Credit Card Interest Rates: How Do They Work?
14.9% APR, 15% fixed rate, 16% variable and 11% standard...but what does it all mean? The world of financial talk can be highly confusing and when you’re thinking of applying for a credit card, you need to know exactly what it is you’re signing up for.
What are Interest Rates?
Interest rates are literally how ‘interested’ a bank is in you as a borrower. Banks are there to make money and they do this by charging an interest rate on the money they loan you. Very simply, this means that the money you pay back to the bank is more than you borrowed and the higher the interest rates, the more money you will pay back. A simple example: if you borrow $100 at 10% interest, you will pay back $110 but if you borrow $100 at 50% interest, you will end up paying back $150. So it always makes sense to choose the borrowing option with the lowest interest rates.
What are Credit Card Interest Rates?
Credit cards are a form of money borrowing. Instead of you walking into a shop and paying the shop owner $200 for a dinner set, you give the shop owner your credit card, the bank pays the shop owner $200 and you then repay the bank. You might not repay the bank the full $200 all at once, you may decide to pay the bank back $20 a month until the $200 is paid off.
The interest rate on your credit card is charged against the amount still owing so you will owe more in interest at the beginning of your repayments, when you have borrowed $200 from your bank, than you will five months in when you only have $100 left owing. The quicker you pay off the loan the better for your bank balance. If you stick to the bare minimum payment per month you will end up paying the bank more in interest rates because you will have borrowed the money over a longer period of time.
This is a simple illustration of what credit card interest rates mean, but at the same time they are not really as straight forward as that. Interest rates also take into account fees and charges that the bank levy on the type of card you have. These fees may include late payment fines and transaction fees which are also factored into the advertised card interest rates.
Interest rates are generally displayed as APR, which stands for Annual Percentage Rate and it is law that credit card interest rates should be displayed on the product so that the borrower knows the rate they are signing up for and can compare products.
If you do an online search you will also find a number of ‘APR calculators’ which can help you to work out the credit card interest rate repayment total.
The Credit Card Rates Lingo
With regard to credit card interest rates there are a number of terms used when choosing a credit card:
Annual Percentage Rate (APR): the total cost of credit to the consumer, expressed as an annual percentage of the amount of credit granted. APR is intended to make it easier to compare lenders and loan options
Fixed Rate: this means that the interest rate you sign up for when you take out a card, such as 16%, should not change over the duration of that account. However this can be deceptive as it is possible for banks to change the APR provided they give at least a fifteen-day notice period or a late payment may trigger a higher interest rate.
Variable Rate: This means that the interest rate of the credit card is linked to that of the Federal Reserve. Your interest rate may vary month to month but it may go up as well as down.
Standard Rate: is usually another term for a variable interest rate, illustrating the standard APR amount you can expect to pay. Of course, this can go up or down also.
Prime rate: the interest rate the bank or issuer charges to those borrowers with the best credit rating. So a lender offers a prime lending rate to the best customers. The credit card interest rate APR offered to other borrowers is often based on the prime rate plus a percentage.
What are 0% Credit Card Interest Rates?
A large number of credit card options offer an introductory 0% interest rate on spending and balance transfers. These are exactly that – introductory offers, and after six to twelve months, the standard ongoing APR will be instated. It is quite common for people to move their debt between 0% credit card offers so they avoid paying any APR. This may be a hassle as you have to remember exactly when the 0% deal ends and apply for another credit card in time. The advantage is that you may save hundreds of dollars in interest repayments each year. But the practice of moving credit card balances from one 0% credit card offer to another will lower your credit rating.