Credit card rates, also called the APRs, often appear as the most prominent thing on any credit card advertising. A lot of consumers compare credit card interest rates from various offers and just go for the one with the lowest interest rate. But, are credit card APRs the most important factor for choosing a credit card?
No doubt, a low credit card APR will decide the main cost of your borrowings if you do carry over a balance in your credit card. However, if you pay off your balance in full every month then you would probably disregard the interest rate. So understand the interest rate of credit cards and how issuers determine their rates first, before you apply for a card.
Different Types of Credit Card Rates
Credit card issuers usually quote the APR (Annual Percentage Rate) as the yearly interest rate for using their card if you carry over a balance, if you take out a cash advance, or if you transfer a balance from other credit cards. A credit card may have several APRs:
- Introductory APR. An introductory rate is an interest rate that is offered by a card company for a limited period, usually the first year of using the card. This is usually very low; sometimes zero APR to attract you to apply. At the end of the introductory offer, the APR will be the on-going interest rate.
- One APR for each type of transaction. Card issuers often times apply different APRs for different transactions. For example, the APR for cash advances and balance transfers often are higher than the APR for purchases.
- Special APRs. These types of annual rates would depend on the contract you have signed. If your terms specify a penalty APR when you are late in making bill payments, this kind of rates would apply.
- Fixed or variable APR. Fixed interest rate doesn’t change from month to month. But a variable interest rate changes monthly. Your rate is calculated by adding interest charge to Fed Rate or Prime Rate — for example, 5% + Fed Rate. Both the fixed and the variable rates could be changed by the bank anytime.
Calculate Credit Card Interest Charges
Your credit card company grants you an authority to spend their money, in return for a promise that you will repay them in the future, called payment-due date. They print the date on your card’s monthly billing statement together with the outstanding balance.
You can pay for the total outstanding balance on the payment due date. But if you don’t pay the balance in full, the card company allows you to borrow the money until the next month’s payment-due date, for a fee. This fee is determined based on the agreed interest rate on your credit card.
For a calculation example, let’s say you don’t pay the total outstanding balance. The real interest applied to it is called the monthly periodic rate, which equals to APR divided by 12. Your card issuer adds this interest charge to the unpaid amount and becomes next month’s outstanding balance.
Every month, if there is unpaid outstanding balance the card issuer will charge you with the periodic interest rate. This process is called compounding interest. And the total of the compounding interest is the Effective Annual Rate (EAR), which is higher than the quoted APR. This is the TRUE credit card rate.
When Low Credit Card Rates Mean Good to You?
APRs are one of many important factors for choosing a credit card. If you plan to hold a balance in your credit card you might try the introductory low rate offer. But be sure to ask the issuer what their APR is after the introductory period is up and whether the rate is fixed or variable.
However, if you pay off your balance in full every month then you may disregard the credit card rates and pay attention to other fees and charges. In fact, settling the total outstanding balance monthly is a wise decision. And you can easily avoid any hidden fees and charges if you pay your bills on time.
Now you can shop around and compare the best credit card offers to get the best deal for your needs.