Every credit card has a fee structure and one of the most important fees to look out for is the Credit Card Interest Rates. While other fees may be charged annually or when you carry out certain transactions, interest rates refer to the general fees you pay for carrying any balance.
It is expressed as an APR or annual percentage rate. Your card disclosure contains a list of all the APRs for your credit card. You can also find on the Card issuer’s website before you apply. You need to understand how interest rates are charged. This will help you to probably avoid them or adjust the way you use your card.
How Credit Card Interest Rates are charged
Most credit cards have a grace period during which you can pay your credit card balance in full and avoid paying interest. Any balance left beyond the grace period will be charged interest in the form of a finance charge.
Finance charges are calculated in a variety of ways depending on your credit card terms. Some credit card issuers calculate finance charges based on your average daily credit card balance, the balance at the beginning of the billing cycle, or the balance at the end of your billing cycle. Finance charges may or may not include new purchases made on your credit card.
Fixed vs. Variable Credit Card Interest Rates
There are two basic types of credit card interest rates:
- Fixed and
- Variable
Fixed interest rates can only change under certain circumstances and the credit card issuer must send advance notice before changing your rate.
Variable interest rates, on the other hand, are tied to another interest rate and can change whenever the index rate changes. An example is a Prime rate. Your credit card issuer doesn’t have to give advance notice for any changes in your variable rate. The majority of credit card interest rates are variable.
Types of APRs
Your credit card comes with different APRs for different types of balances. Such as purchase APR, the cash advance APR, and balance transfer APR. Each of these interest rates may be different. Your card may also have a penalty APR that goes into effect when you default on your credit card terms.
When you make a payment to a credit card that has different balances with different APRs, any amount above the minimum payment must go to the balance with the highest APR.
Periodic Credit Card Interest Rates
Credit cards also have a periodic rate. This refers to a regular APR that is charged for a period of time less than a year. The periodic rate for monthly interest is simply the APR divided by the number of months in the year, e.g. 18% / 12 or 1.5%. Periodic rates are more often based on a billing cycle shorter than one month. In that case, the periodic rate is calculated as (APR/days in a year) * days in a billing cycle. The daily rate is another periodic rate calculated by dividing the APR by the number of days in the year (365 or 366 in a leap year).
When Interest Rates Can Increase
Your credit card issuer can raise your interest rate only at certain times:
- Firstly, when you default on your credit card terms
- when the index rate increases
- when a promotional rate expires, or
- Lastly, when changes are made to a debt management plan.
How to Opt-Out of a Rate Increase
If you receive a notice for an interest rate increase, you have the right to opt-out of the new interest and continue paying your credit card balance at the old rate. Your credit card issuer may decide to cancel your credit card if you are opt-out, but you won’t have to pay the higher interest rate. To opt-out, simply send an opt-out letter to your credit card issuer within the opt-out period.
How to Avoid Paying Interest
With most credit card balances, you can avoid interest by paying the full balance listed on your credit card statement. With certain balances, like cash advances and balance transfers, it isn’t so easy to avoid paying interest because those balances don’t have a grace period. In that case, your best option is to minimize your interest charges by paying your balance off quickly.
