Credit Card APRs

The APR or annual percentage rate on your credit card can be a scary thing to consider. It appears as a bold number and seems simple to understand, but it is anything but simple. The APR is the interest rate charged for any credit that is extended to you on your credit card expressed as a yearly rate. In the original offer for the credit card interest rates will be described in as fixed or variable, although in reality there is not a lot of difference. Variable rate cards will have their APRs tied to an index – normally the prime rate which is in turn closely follows the movement of the Federal Funds rate – plus a margin added to this index. A variable rate will go up and down as short-term rates change in the larger economy. If you think interest rates may be headed down, a variable rate card may be a good thing. If the balance on your card is overly burdensome, a variable rate may be the better option since these rates are generally lower than fixed rate cards and if rates change dramatically as long as the balance isn’t a tremendous burden to payoff you can reduce that balance as rates rise. You may think you avoid interest rate risk with a fixed rate card but you won't. Federal law allows card issuers to change any terms of the card, including the interest rate, with just 15 days advance notice in writing. They won’t hesitate to change it as rates go up, but will be eerily silent when rates go down. You have to read the letters and the odd notices that show up in your statement to avoid rate shock when your next statement arrives. If you have several cards you’ll want to use the ones with the most favorable rates. It makes a difference over time. If you normally carry a balance on your credit cards, a low interest credit card is good for you. The difference between a low 12 percent APR interest rate and a higher 16 percent APR interest rate is significant over time, and it’s really worth your while to maintain good credit and qualify for the best rates. Take time to maintain good credit or repair any damages you may have already made; the difference in interest rates over time is more of an impediment than most consumers care to admit. No one wants to get a cash advance on a credit card because it really costs a lot to do so. That’s because the APR for a cash advance is different and considerably higher than the nominal rate APR for purchases. So, if you need an advance for a good reason or a bad one, at least look at the APR for cash advances before you get it. It may make you consider other options. There are also different APRs for balance transfers. Issuers will lure you onto their card by having a low initial APR to establish the account, and then have a significantly higher APR just for transactions involving a balance transfer. The balance transfer APR is often an introductory rate that has a relatively short expiration time period. Similar introductory rates for new cards can also seem sweet but then turn sour. A card may have a tiered APR where different rates apply at different balances; you may pay one rate on balances up to $3000 and a higher rate for any part of your balance above $3000, for example. Here’s the worst one. The credit card company will just about always have in their agreement with you a provision that allows them to crank up the APR if you make a late payment. They won’t hesitate to do it, either. This rate is usually referred to as the penalty APR under the terms and conditions of the credit card agreement. So always remember the cardinal rule of credit card use – always make the payment on time. It costs a lot of money to do otherwise.