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Credit Card Interest Rates 101 |
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Written by Administrator
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Dec 20, 2005 at 05:53 PM |
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Before you open the envelope containing your brand new credit card be sure to read this article on credit card interest rates.
So you just opened an envelope that contained a shiny piece of
plastic with your name on it. Awesome a bank or financial
institution just gave you a line of credit! Before you start
joyously swiping it on just about any cash register, take the
time to read this article to understand the credit card
interest rates.
A credit card is an authority to spend the money of the company
that issued it, in return for a promise that you will repay them
in the future, called payment-due date. This date is written on
your cards monthly billing statement together with the total
cost of the items you purchased for that month (outstanding
balance). Smart credit card users pay for the total outstanding
balance on the payment due date. However, there maybe instances
that you will not be able to. During these times, the card
company lets you borrow the money longer, until the next
months payment-due date, for a fee. This fee is calculated
based on the credit cards interest rate.
Usually, credit card companies quote the APR (Annual Percentage
Rate) as the interest rate for using their card. But, this is
not entirely true. When you do not pay the total outstanding
balance, interest is applied to it, called the monthly periodic
rate (equals APR/12). This is added on to the unpaid amount and
becomes next months outstanding balance. Every month, the
periodic rate is applied to whatever outstanding balance is
unpaid. This process is called compounding interest. So, the
total of the compounding interest is the Effective Annual Rate
(EAR), which is in-fact bigger than the APR. This is the TRUE
interest rate of the credit card. Consult
http://www.abcguides.com/creditcards/cci_faq.htm#interest for
an illustrated example of the discussion above.
An introductory rate is an interest rate that is offered by a
card company for a limited period (say 1st year of using the
card). This is usually very low, sometimes 0% to attract you to
apply. After the limited time, the EAR will be the on-going
interest rate. Be sure to check this before signing up.
Also, ask whether your rate is fixed or variable. Fixed
interest rate does not change from month to month. A variable
interest rate changes monthly, based on some industry rate (for
example, Fed Rate or Prime Rate) from which your rate is
calculated (your rate is 5%+ Fed Rate). It may be smarter in
the long run to choose a fixed-rate card.
Now that you have a better understanding on credit card
interest rates, it is still wise to settle the total
outstanding balance monthly. Else, pay only for what you can
afford, as if you did not have the credit card.
About The Author: David Riewe is a Publisher and Online
Marketer. Visit his Credit Resources Blog Below:
http://www.push-button-online-income.com/creditcards/ |
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Last Updated ( Dec 20, 2005 at 05:58 PM )
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