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%|
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.
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.
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 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.