Understanding Credit Card Rates

8/17/2020

Having a credit card can be a huge benefit to your financial goals, from boosting your credit score to giving you more flexibility when it comes to making big purchases. While you may be familiar with the interest rates, not every cardholder understands how interest is accumulated or how it impacts your finances.

If you’re unfamiliar with what makes interest and credit card rates, you may not be able to get the most out of your card. Each credit card offers a list of various rates but how the card is used will determine how the rates apply. All of your rates are applied to the overall interest and annual percentage rate (APR).

If you’re familiar with APR, you may have an understanding of what your interest rate may be. However, many card owners don’t realize that there can be additional rates and penalties applied to your credit card. At Arkansas Federal Credit Union, we provide our members with a great understanding of their account and the rates that may be applied and are happy to answer questions you may have about credit cards with us.

It is important to understand credit agreements before you sign up for a credit card. Your credit agreement and statement will outline all of your rates that you are agreeing to. However, many cardholders aren’t aware of the different types of credit card rates that come with using a credit card.

Credit Card Interest Rates and APR

Most credit cards come with interest charges that accumulate as you make purchases on a monthly basis. The interest rate on a credit card is considered to be the fee that you are charged to use it and is usually expressed in APR. If you apply for a credit card, your bank or credit union will use the APR to calculate the monthly payment you’ll make towards your credit card balance. However, card rates that are included in your agreement include how many fees you could be charged when signing up for a new card.

Fixed APR & Variable APR

There are two main types of APR that card owners should be aware of: fixed APR and variable APR. Although they may sound simple, people often confuse the two. A fixed APR is a rate that stays the same throughout the period of your agreement. This type of APR is always constant.

On the other hand, variable APR can change and fluctuate over the course of your agreement. Variable rates are usually tied to an index and can be higher or lower depending on how the index changes. Variable rates are the most common.

Purchase Rates

When you think of interest rates, purchase rates may be what comes to mind the most. A purchase rate is the APR applied to all of the purchases you make that accumulates typically on a monthly basis. This is usually the standard contract rates that you agree to when you obtain the credit card. Finding the best credit card rates can help you save on purchase rates and your monthly credit card payments.

Penalty Rates

Credit cards are a great way to finance purchases and build your credit. However, they can drastically impact your credit if you default on a payment or don’t pay the minimum payment every month. When this happens, you can end up paying more in penalty rates. Penalty rates are usually much higher than the monthly interest rate that accumulates when you make purchases. Understanding penalty rates before you sign up for a credit card can help you avoid unexpected high penalty rates if you miss a payment.

Balance Transfer Rates

Simply put, a balance transfer credit card rate is the accrued interest when you make a transfer from one account to another. Although not every financial institution does this when a transfer is made, balance transfer rates are a common feature of most credit cards. Additionally, there are occasions when the balance transfer rate can be more than the purchase price of your charges to your card. Usually balance transfers are used to transfer between credit cards to bring down your monthly payments and reduce the interest by switching to a better card with a better rate.

Cash Advance Rates

When you use your card to get cash, otherwise known as a loan against your credit lien, you’re often charged a special rate called a cash advance rate. This is a separate APR that is usually higher than your regular APR. Additionally, there are not many cash advances that have a grace period for repayment. If you use a cash advance, you will usually be expected to pay the APR starting on the day that it is taken out instead of at the end of a billing cycle.

Promotional Rates

Credit card promotional rates are often temporary rates that get you to sign up for a new card. For example, a promotional rate may say “get an extra 10% off when you use your store credit card,” or “save an extra 30% when you apply for a store credit card today.” They can be used on an existing card or as an introductory discount for a new card.

Although promotional rates seem like a great way to save money where you shop, the agreement may prove otherwise. It is important to know what your credit card payment rates will be after a promotional rate ends. If you use your credit card for promotional purposes, the lender may apply whatever you pay back to the balance with the highest amount of interest owed too.

How To Calculate Your APR

Credit companies typically base their interest rates and APR on your credit “worthiness.” Your Fair Isaac Corporation (FICO) score is used to determine what your interest rate should be. Your FICO score is a three digit number based on your credit report. It helps you determine how trustworthy and likely you are to pay back your credit card payments.

Your overall APR is usually calculated based on your FICO score and your credit report. Based on this information, your financial institution will usually provide you with a list of credit card rates and options that they’re willing to offer you.

Additionally, some banks can raise and lower your APR at any given time without notifying you. Reading through your credit card agreement will help you have a better idea of what payments and rates you could be faced with.

At Arkansas Federal Credit Union, we offer great low credit card rates to our customers and members. We offer a variety of credit cards to fit your needs. We also offer membership perks and security for your account. Contact us today to learn about credit card options, current rates, and special offers.

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