A credit card’s interest rate is often the most important feature of the credit card because is it determines how much you’ll pay to carry a balance on the credit card.
A credit card is a card that lets you access a credit limit that’s been loaned to you by a credit card issuer. When you use a credit card, the purchases go against your credit limit and you’re expected to make at least the minimum payment by the due date.
Credit Card Rates 101
What are the types of credit card rates?
Credit cards have several different interest rates, also called APRs or annual percentage rates: fixed rate, variable rate, purchases APR, default APR, cash advance APR, and balance transfer APR are the most common.
Fixed Interest Rate
Unlike other financial products, the fixed rate on a credit card can change. However, credit card issuers can only change fixed rates in certain circumstances. To change the fixed rate, the credit card issuer must send a 45-day advance notice giving the cardholder a chance to opt-out of the interest rate change. Credit card issuers can’t change a fixed interest rate within the first year of the credit card.
Variable Interest Rate
A variable credit card interest rate is tied to another interest rate, like the U.S. Prime Rate. There’s a fixed component of the variable interest that’s added to the index to make up the full interest rate. Whenever the underlying interest rate changes, the variable interest rate also changes. Credit card issuers don’t have to send advance notice of a change to a variable interest rate.
Purchases Interest Rate
This is the interest rate that applies to purchases and charges made on the credit card. When you hear a credit card interest rate stated, it’s most often the purchases interest rate.
Balance Transfer Interest Rate
A credit card could have a different interest rate that’s applied to balances transferred from another credit card. Often the balance transfer interest rate starts out low, aka an introductory rate, and then increases after a certain period of time.
Federal law requires introductory rates to last at least six months. Non-promotional balance transfer rates are often higher than regular credit card interest rates.
Cash Advance Interest Rate
If you use a credit card to withdraw cash from the ATM, that transaction will have a different interest rate. The cash advance interest rate is usually the highest interest rate of all. Cash advances seldom have a grace period – which is the amount of time you have to pay your balance in full and avoid a finance charge. That means interest begins to add up on a cash advance right away.
Default Interest Rate
The default or penalty interest rate is charged when you default on your credit card terms. It’s the highest interest rate charged on your credit card. Credit card issuers charge the default interest rate if you exceed your credit limit, fall behind on your payment by 60 days, or if the check for your payment bounces.
How are credit card interest rates determined?
Credit card issuers review your credit history to determine your interest rate. If you have a good credit score, you’ll qualify for the lowest interest rate. On the other hand, if you have a bad credit score, your interest rate will be higher.
Can I avoid credit card interest?
Most credit card issuers give you a certain amount of time – a grace period – to pay the balance in full before they assess a finance charge on the balance. This finance charge is based on the credit card interest rate. The higher your interest rate, the more your finance charges will be.