Credit Card Rate

What Is The Credit Card Rate

The credit card rate is one of the most important issues to consider when applying for a credit card. You should know and compare the rates of several card companies. Shop around for the best deal.

As  you probably know, a charge card authorizes you to spend money of the issuing company. In return, you promise repayment in the future, otherwise known as a due date. There is no mistaking this due date because it is written plainly on each monthly billing statement together with the total cost of items you bought during that month - your outstanding balance due. Smart card users will pay the entire balance due on or before the due date.

However, there may be times when you just cannot pay the full balance. It is then that the company lets you keep the borrowed money longer -- until the due date the next month -- for a fee. This is where the credit rate, otherwise known as the interest rate, comes into play, for the fee is calculated based on the credit card interest rate.

So, card rates are used to measure how much you would pay if you hold over a balance on your account, or if you have a cash advance and/or if you transferred a balance from another card.

APR, APR/12, EAR, & True Interest Rate

Card companies usually quote the APR (annual percentage rate) as the interest rate for using their card. However, in actuality, when you do not pay the total outstanding balance, interest is applied to it. This is called the monthly periodic rate (APR/12) and is added to the unpaid amount. This becomes the next month's outstanding balance.

Each 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 bigger than the APR, and is the true interest rate of the credit card.

Introductory Rates

An introductory rate is a rate offered by a card company for a limited period. For example, maybe the first year. This rate can be very low, sometimes even 0%  to attract buyers. After the limited time offer, the EAR will kick in and be the on-going interest. Be sure to check all of this out before signing up.

Fixed Rate vs. Variable Rate

Another thing to be sure about is whether the interest rate is fixed or variable.

A fixed rate does not vary from month to month, while a variable rate changes monthly based on some industry rates, for example the Fed Rate or Prime Rate from which your rate is calculated. Check out both rate type and determine which will be most beneficial for you and the way you use your credit cards.

In summary, hopefully, you will now have a much better picture of interest rates on your credit cards and what they mean. All in all, it is always to your advantage to pay your total outstanding balance off every month.

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