Understanding Interest Rate Options on Credit Cards

One of the most confusing things about a credit card agreement is trying to get a handle on how much you will actually be charged when using the card. There are a number of possible rates that can be assessed in various circumstances depending on how the card is used. There is also a series of “rules” that must be followed in order to gain the benefit of advertised rates. This can lead to confusion and the loss of the lower rate you thought you would be receiving.

Introductory Rates are also called teaser rates. These are offered to new account holders in the hopes of enticing you to apply for the card and then make purchases or transfer balances during the introductory period. The first purchase must usually be made within 30 to 90 days of account opening and the introductory rate is typically good for 6 months to 18 months. Promotional points or higher point accumulation for a short period are common variances to low introductory rates.  The following are common conditions that apply to introductory rates.

  • Available to new applicants only
  • Rates good for 6 to 18 months on average
  • Minimum Payments must be made during promotional period
  • Purchase rate applies to any remaining balance at the end of the introductory period

Promotional Rates are similar to introductory rates but are offered to both new and existing card holders. They offer a 0% or very low interest rate for a certain period of time with a minimum promotional period of 6 months. Rates will generally apply to purchases and/or balance transfers and entice you to use the card and carry a balance. Often minimum purchase amounts are required to receive the promotional rate. You might see an advertisement that says 6 months at 0% interest on purchases over $500.  The following describes some typical conditions that apply to promotional rate programs.

  • Available to new and existing cardholders
  • Rates good for 6 to 18 months on average
  • Minimum Payments must be made during promotional period
  • Purchase rate applies to any remaining balance at the end of the promotional period

Deferred Interest can be confused with the promotional rate because the advertising for these programs is very similar. The difference, however, is significant. Deferred interest is almost always at 0% for a certain period of time and requires that the balance be paid off before the promotional period ends. If you fail to pay all of the balance off by the end date, then the entire purchase is charged interest from the date of purchase, losing the entire benefit of the promotion.  Deferred interest program usually come with one or more of the following restrictions.

  • Available to new and existing cardholders
  • Rate is good from 90 days to several years
  • Minimum Payments must be made during promotional period
  • If balance not paid in full by end of promotional period interest accrues from the purchase date

Purchase Rate is the rate you pay when you use your credit card for everyday purchases. For most consumers this is the most common rate that will be applied to existing balances. With purchases, if you pay the balance in full each month, there is an interest free grace period from the purchase date to the due date. Once you carry a balance over, interest will begin on purchases the date the charge is made. When promotional and introductory rates end, the purchase rate is generally the rate any remaining balance is charged.  The following are some of the conditionat that typically apply to the purchase rate of a cardholder agreement.

  • Available to new and existing cardholders
  • Permanent rate charged for purchases made with the card
  • Minimum Payments must be made in order to access credit limit
  • Ability for interest free borrowing is balance is paid in full each month

Cash Advance Rates are the most expensive way to borrow money on a credit card. Convenience checks and PIN numbers are often provided when an account is opened to provide easy access to cash for the consumer. This convenience comes at a price. When cash is accessed through a cash advance the rate may be as high as 11 percentage points higher than the purchase rate. High fees are also associated with cash advances averaging 3% to 5% with minimum charges applying. This translates to a high interest rate loan and should only be used in the case of a true emergency. Cash advances can be incurred if you access cash from an ATM, use your credit card account as an overdraft on the checking account, or access cash with a provided convenience check. With credit cards being widely accepted around the world, using cash advances can almost always be prevented.  Many cash advance rate program come with one or more fo the restrictions listed below.

  • Available to new and existing cardholders
  • Highest rate offered for using credit card
  • No grace period, higher interest rate is charged immediately
  • Cash advance fees can be high, with minimum fee charges

Balance Transfer Rates offer low interest rates for a period of time in the form of an introductory or promotional rate. There is almost always a transfer fee that averages from 3% to 5%. This fee should be considered when calculating savings. It is a good practice to transfer only the amount that can be paid in full during the promotional period. Otherwise, when the low rate expires, you may lose any amount saved if the ongoing purchase rate is higher than the previous card. It is also possible to transfer other loans through a balance transfer, not just credit cards. Typically you must have very good to excellent credit to qualify for high enough credit limits to make a balance transfer useful.  The following describes some of the details of a balance transfer rate program.

  • Available to new and existing cardholders
  • Balance transfer fees average between 3% and 5% with minimum fee charges
  • Minimum Payments must be made during promotional period
  • Purchase rate will apply to any remaining balances when the promotional period ends

The Default Interest Rate is the rate charged when you miss a payment. Most default rates will be applied when you become 60 days past due on an account.   These rate excessively high interest rates can begin a downward spiral in controlling your finances. When the default rate kicks in, the late payments have been reported to the credit bureaus and additional late fees are accumulating on the account. This rate is generally higher than the cash advance rate and will not revert back to the purchase rate until the account has been current for 6 months. The following describes in detail the characteristics of the default interest rate.

  • Highest rate charged by credit card companies
  • Activated when you miss your second payment
  • Must catch up account for 6 months to reduce rate
  • Can lead to a reduction of your credit limit or closing of the account

Given the high number of different rates that can impact a cardholder’s account, many people have balances that are charged very different rates. Credit card advertising will always promote the lowest rate even if it is only for a short period of time. When choosing a credit card or evaluating whether to transfer a balance, look at all the potential rates and fees. Read the fine print and ensure you understand all the terms and conditions before moving forward. Often what looks like free or cheap money, could end up being more expensive over time.

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