Understanding today’s credit card rates is a critical part of the credit card selection process.  Sure, credit card rewards are great and the type of credit card selected can be important but understanding the ins and outs of credit card rates can help save a lot of money. 

Even after new credit card rules were passed via the Credit Card Accountability Responsibility and Disclosure Act of 2009 or Credit CARD Act of 2009, understanding current credit card rates and terms is not an effortless undertaking.  In fact, even crazy Senator Elizabeth Warren made a remark about the complexity of credit card rates by stating that the Consumer Financial Protection Bureau’s “next challenges will be about further clarifying price and risks and making it easier for consumers to make direct product comparisons.”

The interest rate on a credit card is the price the card holder pays for borrowing money to make transactions with the credit card account.  The interest rate or rates are stated as a yearly rate, called the annual percentage rate (APR).  Credit cards can have either a fixed interest rate or a variable rate. 

With a fixed rate credit card the rate, or APR, will not fluctuate with changes to an index.  The rate will generally remain fixed for a period of at least one year, this can change only if certain circumstances take place such as the account holder misses two consecutive monthly payments.  After the initial one year period, the credit card issuer can change the interest rate for new purchases as often as the credit card agreement allows.  The card issuer must also give the consumer 45 days written notice of a rate increase and unless the card holder is falling behind with the payments, the changes to the rate will apply to new purchases only.

A credit card with a variable rate or variable APR will experience rate changes when there are changes in an underlying index.  Almost all variable rate credit cards today use the Prime Rate as the index to determine future rate changes.  The rate on the credit card will generally not be the Prime Rate but the Prime Rate plus a margin which is a preset number added to the Prime Rate to create the actual credit card rate used for transactions.  An example might be the Prime Rate plus 7.5%.  Rate changes for variable rate credit cards can also change if the account holder is delinquent, just like fixed rate credit cards.

Most fixed rate credit cards are offered with one set rate for purchases, a set rate for balance transfers, and one for cash advances.  Variable rate credit cards are frequently offered with tiered rates or a range of rates for each transaction type.  An example of the tiered rates may include a offer for a new credit card that has a purchase rate of Prime plus 6% to 10%.  The APR offered to a particular card applicant will be determined by that applicant’s credit profile or credit score. The higher the credit score, the lower the APR will be.

In addition to the different rates offered for purchases, balance transfers and cash advances, some credit card offer low teaser rates or promotional rates.  Promotional rates have predetermined time period during which time transactions can be made that rate.  special promotional rates may be for new purchases, for balance transfers or other specific types of transactions.

When a promotional rate is offered, the credit card company has to let the account holder know how long the rate lasts and the rate that will be in effect when the promotional rate expires.  When the promotional rate expires, the card issuer can automatically raise the rate in accordance with the agreement without sending advanced notification.  Promotional rates, when available, must apply for a period of at least six months.

The cardholder agreement is one of the best sources of information regarding credit card rates and terms.  The cardholder agreement is essentially a contract between the consumer and the credit issuer that will include details about the credit card terms and conditions.  Consumers can usually get a copy of the agreement on that card issuer’s website, and or it can be requested directly from the card issuer.

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