Understanding Credit Card Interest Rates
OnlineGuideTo.com — Applying for a credit card is not simple as it looks. You might think that it will only involve filling up the forms and activating these little plastics. In reality, you will have to know important details such as grace period, penalty fees and of course, the interest rate.
As you may know by now, one of the ways a credit card company generates revenue is through the interest rate. Any amount you charged on your credit card will be subject to interest rate if not paid in full, on or before the due date. Basically, the credit card company recovers its losses through the interest charges.
In the United States, interest rates charged by credit card companies vary. Typically, interest rates are between 7 to 36 percent and usually computed and compounded monthly.
Since there are different types of interest rates applied on credit card charges, it is important that you learn about them. Here are the most common types of interest rates in the market today.
- Periodic Interest Rate – this is actually an interest rate that is a fraction of the annual rate. The periodic interest rate is usually used for terms that are shorter than 12 months. For instance, if the annual rate is 12% then the monthly periodic rate for a 12-month term is 1%. (0.12/12). Depending on the bank, the periodic rate can also be computed on a daily, quarterly or semi-annual basis.
- Annual Percentage Rate - this interest rate is actually an expression of the effective interest rate. Basically, it is the total credit cost that will be shouldered by the consumer. Of course, the amount of credit granted will also be a factor in computing for the annual percentage rate. Most credit card companies use the APR to calculate interest rate and consumers choose credit cards based on this.
- Compounded Interest Rate – interest rate that is accumulated and added back on the principal loan amount is referred to as compounded interest rate. If this is the type of interest rate used by your credit card company, then you should make sure that you pay your monthly bill in full or you will be surprised with how much your debt will grow.
- Effective Interest Rate – also termed as effective annual interest rate and annual equivalent rate. It differs from the APR in two things: it does not incorporate front fees and other one time charges; and it is not generally used by regulatory or legal authorities.
As a word of precaution, these credit card interest rates may vary depending on the agreement that you signed. Some interest rates are just introductory rates and you should be aware of details like this. That is why it is important you read the application form before signing anything.
Learning about the different interest rates will provide you with a way to understand your credit card bills and also help you avoid surprises, especially if you happen to make the mistake of paying your bills late.
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