When Do Credit Cards Charge Interest?

When Do Credit Cards Charge Interest?

It is common knowledge that credit card debt accumulates due to several factors – one of which is the buildup of interest charges. But these charges do not apply to your credit card accounts for no reason; most of the time the card user has caused it.

One way of managing your credit card successfully is by knowing how interest rates work and how they are applied to your account. 

 

Your Credit Score Has a Big Impact on Your Credit Card Interest 

When you apply for a credit card, don’t think right away that you will be getting the attractive advertised rate of that card. Your annual percentage rate or APR, upon your approval, will depend on your credit score.

It’s customary that credit card issuers advertise a range of potential interest rates on their products that ranges from 13.99% to 22.99%. Cashback and rewards credit cards are packaged uniquely to attract your business, but they often have higher rates so be sure that the benefits outweigh the risks of paying more for interest. 

Banks and credit card issuers set the interest rates on your credit card based on the risk you pose in their credit analysis. Among their concerns is your ability to repay, which is determined by studying your debt-to-income ratio. It’s possible that even if you carry a variety of credit card products, you’ll notice that they differ in interest rates. 

Below is a simple illustration of how credit card interest rates differ depending on your credit score. 

Credit Score Category Effective Interest Rate 
Deep Subprime (579 or lower) 21.0%
Subprime (580 – 619) 20.5%
Near Prime (620 – 659) 19.0%
Prime (660 – 719) 16.5%
Super Prime (720 or greater) 13.5%
Overall  15.6%

 

Fixed, Variable and Promotional Rates

When determining the best credit cards to apply for, you need to understand how cards vary depending on the type of annual percentage rates they carry. 

credit card interest rates

Fixed-Rate Card

Probably the most basic of all credit cards are those that come with a fixed rate; it’s straightforward and simple. But offers of fixed-rate credit cards are set within a time period only. Issuers set their own terms and factors on how and when their rates would change to a new one and for another set of time. When you apply for such a card, the issuer has to tell you how long the rate will remain fixed. They are also required to provide you a 45-day notice when the rate change to give you time to decide to continue using the card or change to a newer, lower rate card.

Variable Rate Card

Variable-rate cards have their interest rates go up or down in the direction of the prime interest rates. They use indexes such as U.S. Treasury Bills and Federal Reserve Discount Rate, among others, as their benchmarks. Because the variability of the interest rate at any given time is inherent to the product, issuers of this card are not obliged to send rate change notice to their borrowers.

Promotional Interest Rates

Credit cards with promotional rates work like fixed-rate cards – the rates are fixed for a specified promotional period. Some of these cards have promotional interest rates tied to other forms of bonuses, such as cash or discount coupons, when you make a specific amount of purchase.

 

What are The Other Types of Credit Card APRs, and When are They Charged? 

Like most credit card users, you may only be aware of your regular APR, or commonly known as purchase APR. When you pay off your purchase amount in full at the end of each billing cycle, this interest will not apply. When you pay only a portion of your outstanding balance, purchase APR will be charged on your unpaid amount.

However, when you start to make different transactions or mismanage your account altogether, you’ll be charged a different set of rates.

Cash Advance APR

Because your card also comes with a cash advance feature, it’s possible that at any point in time, you will draw some cash from your account. For this transaction, considered by your lenders as cash loans, you will be charged an interest that is higher than your purchase APR. The average balance transfer APR is at 23.68%. Likewise, there is also a fee that is charged each time you make a cash advance –  $10 or 5% of the withdrawn amount whichever is higher.

Interest rates for credit cards

Balance Transfer APR 

If you are transferring a balance from one of your cards to another, then a balance transfer APR would apply along with a fee that is at least 3% to  5% of the transferred amount 

Penalty APR

Penalty APR is considered to be the highest APR that an issuer can apply to your account. Penalty APR that is at least 29.99% is applied to your outstanding balance when you have missed paying your balance for more than 60 days. This APR is kept enforced for 6 months of continuous on-time payments.

 

Can I Dispute For Charges Applied on My Card?

A person should always take full responsibility in monitoring your credit card statement of account because billing errors are typical and may cost you more interest money later on. Once you have established that error is present, you have to send a dispute letter to your creditor within 60 days, and the law requires them to respond to you.

Here are some of the possible billing errors that can happen to your account:

  • Charges that list the wrong date or amount
  • Charges for goods and services you didn’t accept or that weren’t delivered as agreed
  • Mathematical errors
  • Failure to post payments and other credits, like returns
  • Failure to send bills to your current address — assuming the creditor has your change of address, in writing, at least 20 days before the billing period ends
  • Charges for which you ask for an explanation or written proof of purchase, along with a claimed error or request for clarification

 

How Can I Avoid Paying Interest on My Credit Card?

The only way to avoid paying interest on your credit card is to pay off your balance every month. But this is always easier said than done, and it only happens when you have regular money coming in to pay off what you have purchased a month earlier. The moment you leave a balance unpaid, that amount plus new purchases you’ve made will begin to incur interest charges.

You may, however, work on lowering your interest charges by:

  • Knowing your credit terms. Even if all credit cards generally have the same terms, they still have some differences depending on how they package their product. Knowing what factors are involved in charging fees and high interest will help you avoid them as you use the card.
  • Improving your credit score. By taking actions on ways to improve your score, you’ll have higher chances of bargaining for a lower interest rate on your credit card.
  • Paying your bills on time. Paying your bills on time and more than the minimum amount due will lessen the amount of your outstanding balance. This means less money added to your balance as interest charges.
  • Avoiding unnecessary cash advances on your credit card. The balance transfer APR is 8% higher than your purchase APR. This rate will apply until you have fully paid your cash advance amount.
  • Stick to a spending budget. Mindless spending using your credit cards will likely bring you to risk of default. 

Unless you’re diligent in paying your credit card balance in full each month, then you don’t have to worry about mounting interest charges. But like most people that carry a balance on their cards, paying for interest is longer avoidable. Interest charges are your bank’s or creditor’s way of balancing the risks that come with each credit card use. You, on the other hand, can avoid debt accumulation due to interest rates when you use your card responsibly.

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How to Lower Interest Rates on Credit Cards

How to Lower Interest Rates on Credit Cards

Whether you’re an individual or a small business owner, having a credit card is beneficial because it gives you instant access to credit when you need it. Once you have established your creditworthiness to creditors, your line of credit may increase over time giving you a financial lifeline that you can count on.

 

How Does Your Credit Score Affect Your Credit Card Interest Rate? 

The interest rate you pay on your credit determines the extra percentage you have to pay back for the credit you borrowed. A credit with low interest is easier and faster to repay because of low-interest charges added to your monthly payment.

However, creditors offer varying interest rates on credit cards depending on your credit score. As a rule, the higher your credit score, the higher your eligibility for a low-interest rate and higher credit limit.

Below is general information on the applied credit card interests on different credit scores according to CFPB’s Consumer Credit Card Market Report.

Credit score category Effective interest rate 
Deep Subprime (579 or lower) 21.0%
Subprime (580 – 619) 20.5%
Near Prime (620 – 659) 19.0%
Prime (660 – 719) 16.5%
Super Prime (720 or greater) 13.5%
Overall  15.6%

 

Why Do Interest Rates Matter on Credit Cards?

You may think that if you pay your credit card balances in full every month then the interest rate doesn’t really matter. This may be true, but as you go along your credit journey and apply for several other loans, you will eventually succumb to making partial payments on your credit card balances. Therefore, it is important to get the best deals on your credit cards because:

  • It will save you a lot of money on interest payments, especially on purchases that will be paid off for a period of months or years
  • Low monthly payments are easier to pay off, enabling you to pay more money in advance
  • You’ll be able to maintain a good credit utilization ratio because you’re able to pay off your balances much quicker

 

what is a good interest rate on a card

What is Considered a Good and High APR on Credit Cards?

Annual Percentage Rate or APR on credit cards vary and apply differently depending on the type of balance; you can find the APR details most specific to your credit card in your contract. 

According to the Federal Reserve’s data for the first quarter of 2020, the average APR across all credit card accounts is 15.09%. Credit union credit cards, as a type of secured credit card, have lower APR ranging from 10% to 15%.

Here is a look at the different types of APR and their average rates:

Purchase APR

This is considered as your regular APR that is applied to all your credit card purchases. The average variable rate is between 13.99% to 23.99%

Cash Advance APR

This is the rate applied the moment you borrow cash from your credit card. It is typically higher than your regular APR at 23.68% and has no grace period. Cash advances are not considered a good deal so only use it when in dire need.

Balance Transfer APR

This is the rate applied when you transfer a balance from one card to another, from a high rate to a lower rate. The average rate ranges from 13.99% to 18.99%. Most of the time, the balance transfer rate also serves as the introductory APR and is lower within a certain period before it increases towards the regular rate.

Penalty APR

This is the rate applied to balances when you violate certain terms and conditions of the credit card. It is usually the highest at 20% to 35%.

What may be considered a high APR on credit cards is that which ranges between 20% – 25% and are usually given to people with bad credit. Store credit cards tend to have higher APR as well at 28.24% variable. You’ll find store cards to offer more rewards, perks, or discounts in lieu of high rates.

 

debt to income ration on credit cards

 

How to Lower Interest Rate on Credit Card?

If you maintain credit cards with balances that don’t seem to reduce in amount even with diligent payments, then know that one of the culprits is the high-interest rate. You don’t have to keep up with this; instead, find ways to lower your interest rate on your credit card with some proven strategies:

  1.   Raise your credit score

A good to high credit score allows you bargaining power with your credit card company on lowering the interest rate.

  1.   Improve your debt-to-income ratio

Banks look at a well-proportioned income and debt that is around 36%. When yours is at this level, then you can confidently negotiate for lower rates.

  1.   Check and monitor your credit report

Look for any wrong information on it and find ways to correct it.

  1.   Consider applying for credit union credit cards

You may be required a deposit in lieu of lower rates.

  1.   Transfer your balance

You save money on the lower rate of the transfer as well as the regular rate.

  1.   Look for better rate offers

Try not to be misled on introductory offers or rewards. Look for one that will save you more money to maintain.

  1.   Negotiate with your bank

Once you have done everything to gain a bargaining position, go and talk to your bank to lower the interest rate on your credit card.

 

Always aim to acquire credit cards with low-interest rates because that will not only help you manage your accounts well, but also save you money in the long run. 

 

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