Credit Card Interest Rates Explained

<< Back to Using Credit Cards correctly

Understanding credit card APR’s

If you’re shopping around for a credit card then no doubt you’ve come across the term APR, or Annual Percentage Rate. This refers to the cumulative interest rate charged by the card over a yearly period, and in most countries it is a legal requirement to include in that rate any other fees (such as an annual rate etc.). Quite often you’ll see credit card issuers refer to the monthly interest rate of, say, 2% which sounds quite reasonable, but in actual fact the APR for a card with that monthly rate would be actually 24% (12 months x 2%), assuming there are no other fees or charges.

From time to time you’re also bound to come across credit card promotional offers that will try to tempt you with a very low introductory APR (referred to as ‘teaser rates’). Be wary of such offers as the APR will go up after a specified period of time so make sure that you are aware of what rate you’ll be paying further down the road. What seems like a good deal today might not be so later on when the typical APR kicks in.

Credit Card fees, late payments and punitive charges

The interest rates alone on credit cards are bad enough, but by the time you factor in late payment fees, annual fees, penalty interest charges, replacement credit card fees, cash advance fees and any administration fees the credit card carries then you can start to see exactly why credit card companies are eager for your business. So when making payments on your credit card, the three things you really must avoid at all costs is to make late payments, pay just the minimum amount due or miss payments altogether.

Make no mistake about it; credit card issuers want you to be tardy with your payments, and they want you to only pay the minimum amount due as this is where they make the majority of their profits. It is estimated that only about one third of credit card users will use their credit cards effectively and pay off their monthly bills in full each time the bill arrives. For the rest, nearly two thirds, the interest rate charges and punitive charges they incur are what keeps the credit card issuers in a healthy profit year after year. By tempting you to only pay the minimum amount due, credit card issuers ensure that you service the loan while continuing to attract the maximum possible interest charges and other fees and ensure that the loan is spread out for as long as possible (meaning they can harvest more interest payments from you for longer). If you miss payments, then the credit card issuers have the right to impose late penalty fees and higher penalty interest rates. These rates would remain in effect until you have paid off the amount outstanding pertaining to that portion of the balance, and the difference between the penalty rate and the normal rate can be quite alarming. This is definitely something to keep an eye out for because you could find yourself paying up to 30% interest on your outstanding amount due to penalty interest rates.

Something also to keep in mind if you think you are going to miss a payment, exceed your credit limit, or any other misdemeanour that might result in a penalty fee is to contact your credit card issuer before the event and see if you can charm your way into avoiding the penalty in the first place. It might not work all the time, particularly if you try calling them every month, but it’s certainly worth trying every so often.