Understanding credit cards interest rates

ADVERTISING DISCLOSURE

ADVERTISING DISCLOSURE:
Credit-Land.com is an independent, advertising-supported web site. Credit-Land.com receives compensation from most credit card issuers whose offers appear on our site. Compensation from our advertising partners impacts how and where their products appear on our site, including, for example, the order in which they may appear within review lists. Credit-Land.com has not reviewed all available credit card offers in the marketplace.

Credit Card Applications » Research » Guides » Cardholder Benefits » Understanding credit cards interest rates

Understanding credit cards interest rates

The content is accurate at the time of publication and is subject to change.

The interest rates charged by credit card companies is dependent on certain factors; the credit card limit, cash withdrawn or purchases made and also the grace period all help to influence such. Before understanding how the credit card interest rates get calculated there is one major difference that needs to be understood before proceeding towards the other factors on which the credit card interest rates depend.

APR and EAR

The APR charged by the credit card companies is misunderstood to be the actual interest that is charged on the remaining balance of the account. This concept is actually false. An APR is actually an approximation of the present interest rate or what it might stand to in the near future. Under stable market conditions an APR is a suggestion of the Effective Annual Rate or EAR. But since the market remains volatile therefore this cannot be considered to be the actual calculation on which the EAR will be based. The APR and the EAR might differ by the end of the financial year.

The EAR on the other hand does not include interest rate changes that might occur due to late payment of fees, balance transfers or introductory offers as granted to the customers. The calculation involved in computing the EAR is complicated and therefore adds to the confusion regarding the calculation of the interest rate charges.

Factors that decide the interest rate

The most important factor that sets up the credit cards interest rates is the corresponding interest rate that is charged by the Federal Reserve of the country, the credit worthiness of the customer that ascertains how quickly a customer can repay his credit bills and his credit history and finally how does the issuer of the credit card project the rate of inflation in future.

If the above factors are responsible for deciding the interest rate charged on a credit card then low interest rate charged by the Federal Reserve Bank, a good credit history of the customer and also stable market rates with balanced inflation will lead to lower calculation of interest rates.

The other important factor that decides the interest rates on credit cards is the charges that get levied due to late payment. All credit card companies have the right to increase their interest rates if a customer fails to pay a credit bill on time. This also justifies the other credit card companies to raise their interest rates.

Balance transfer is another reason that affects credit card interest rates. Usually lower interest rates are charged as an introductory offer. Once the grace period gets over the APR increases and is bought to its original rates on the remaining balance.

Disclaimer: This editorial content is not provided or commissioned by the credit card issuer(s). Opinions expressed here are the author's alone, not those of the credit card issuer(s), and have not been reviewed, approved or otherwise endorsed by the credit card issuer(s). Reasonable efforts are made to present accurate information, however all information is presented without warranty. Consult a card's issuing bank for the terms & conditions.
All rates and fees, and other terms and conditions of the products mentioned in this article/post are actual as of the last update date but are subject to change. See the current products' Terms & Conditions on the issuing banks' websites.
Add to Favorites:

Related Research:

Top 5 Secured Credit Cards: November 2020 – Experts’ Choice

Top 5 Secured Credit Cards: November 2020 – Experts’ Choice

Posted: June 22, 2020

The COVID-19 pandemic has made significant changes not only in people’s lives and their financial standing but also in the entire financial sector of the U.S. We have collected the best secured card offers from our partners so that you can… Continue reading

Top 5 Soft Pull Credit Cards: November 2020 – Experts’ Choice

Top 5 Soft Pull Credit Cards: November 2020 – Experts’ Choice

Posted: June 3, 2020

When applying for a credit card, you definitely don’t want your credit score to go down. Here, you will find the best credit cards with a soft pull from our partners. An application for such cards won’t make changes to your credit history… Continue reading

Top 5 Store Credit Cards: November 2020 – Experts’ Choice

Top 5 Store Credit Cards: November 2020 – Experts’ Choice

Posted: May 30, 2020

We evaluated store credit cards offered by our partners to find the best store credit cards. They are often loaded with perks that will allow you to save on purchases at your favorite retailer. Plus, many store credit cards are available… Continue reading

You've successfully subscribed!

Please specify the following:All these fields are optional

Your Credit History
Themes you are interested in:

By providing this information you help us make our news letters more useful and informative. Thank you!