Credit Cards and Interest Rates
As interest rates continue their upward climb, spenders are starting to take a hit. That might be a good thing, considering last year the US savings rate was actually negative. One of the areas hardest hit for consumers is with their credit cards. While more than half of consumers pay off their balance each month, those that don’t can find themselves hurting for cash for a few different reasons. First of all, most of the major banks have increased their minimum payment requirements. [source] I think it was Congress that finally took action and started to realize that for those with significant balances (a not-so-surprisingly large number) it would, almost literally, take forever to pay off their balance by only paying the minimum.
Banks make their profits off of playing the interest rate game, and so they pay particular attention to where interest rates are and where they’re headed. (For more information, read the Federal Reserve’s annual report called The Profitability of Credit Card Operations of Depository Institutions) This is why many banks are converting many of their fixed-rate credit cards to variable rates (a rate that changes based on a given benchmark - usually the prime rate). [The Wall Street Journal] This transfers the interest-rate risk from the bank onto the consumer.
But for those that do carry a balance over each month, there are still many things they can do to limit the amount they pay to their credit card issuers in fees and interest charges. The best thing to do is to understand how credit cards work (specifically your own credit card account terms & agreement). From the federal reserve’s website, about credit card interest rates:
The annual percentage rate–APR–is the way of stating the interest rate you will pay if you carry over a balance, take out a cash advance, or transfer a balance from another card. The APR states the interest rate as a yearly rate.
Multiple APRs
A single credit card may have several APRs:
One APR for purchases, another for cash advances, and yet another for balance transfers. The APRs for cash advances and balance transfers often are higher than the APR for purchases (for example, 14% for purchases, 18% for cash advances, and 19% for balance transfers).
Tiered APRs. Different rates are applied to different levels of the outstanding balance (for example, 16% on balances of $1–$500 and 17% on balances above $500).
A penalty APR. The APR may increase if you are late in making payments. For example, your card agreement may say, “If your payment arrives more than ten days late two times within a six-month period, the penalty rate will apply.â€
An introductory APR. A different rate will apply after the introductory rate expires.
A delayed APR. A different rate will apply in the future. For example, a card may advertise that there is “no interest until next March.†Look for the APR that will be in effect after March.
If you carry over a part of your balance from month to month, even a small difference in the APR can make a big difference in how much you will pay over a year.
Fixed vs. variable APR
Some credit cards are “fixed rate‖the APR doesn’t change, or at least doesn’t change often. Even the APR on a “fixed rate†credit card can change over time. However, the credit card company must tell you before increasing the fixed APR.
Other credit cards are “variable rate‖the APR changes from time to time. The rate is usually tied to another interest rate, such as the prime rate or the Treasury bill rate. If the other rate changes, the rate on your card may change, too. Look for information on the credit card application and in the credit card agreement to see how often your card’s APR may change (the agreement is like a contract–it lists the terms and conditions for using your credit card).
Another, surprisingly logical, tip for credit card consumers who aren’t happy with their interest rate: Ask for a lower rate! Because most cards don’t have an annual fee, and the other terms are generally pretty equal, the only other tool credit card companies have to keep their customers happy is to lower the interest rate. If you have had the card open for a while, and you’ve made your payments on time, chances are they will lower it for you. But just like any profit-conscious company, they won’t give it to you unless you ask.
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