Interest Rate

Your interest rate is very important when it comes to credit cards. It directly affects how much you owe and how much you pay. Your interest rate can vary credit card to credit card and person to person.

What Exactly is an Interest Rate?

Credit cards basically enable you to take a loan during the course of a month. If you don’t pay back that “loan” by the end of month, interest is tacked onto what you owe. An interest rate is how they determine how much money to tack on. It’s a percentage of what you owe.

In the simplest terms, if you owe a hundred dollars and your interest rate is 10 percent, you will owe $110 by the next pay period. Not a big deal right? Okay, so what if you owe a thousand dollars? If you don’t pay it at the end of the month, you now owe $1,100. And if you don’t pay anything by the next month, now you owe $1,210. See how it starts impacting how much you owe?

Now, credit card rates aren’t quite that drastic. Instead of charging you 10 percent per month, companies are more likely to state your interest percentage rate on an annual basis, with a payment due on the interest and principal due each month.

But That Doesn’t Seem So Bad

You’re right, it could be a lot worse, and it is for many Americans. The average annual percentage rate (APR) on a credit card is around 12 to 15 percent and the average amount American families owe on one credit card is $9,312, and the average American family has three credit cards.

Think about this: if you don’t pay off any of the $9,000 you owe, and your interest rate is only 12 percent annually, after a month you will owe $9,090. In only one month, you’ve increased how much you owe by $90. With a higher balance or annual percentage rate, your interest costs can grow even more quickly. And, if you fail to make your credit card payment on time, the interest charge next month will be applied to the $9,090 plus any penalties you may have incurred for not making your payment.

How Interest is Determined

Most credit card companies start off with low introductory offers, say zero to five percent. But after a few months, that amount can go up quickly, often to the standard 12-to-15 percent. Some merchants offer even higher rates, usually in the 20-to-25 percent range.

Some people try to avoid this by changing credit cards every couple of months. However, credit cards often have a transfer fee, so make sure you read all of the terms.

How Credit Rating Affects Your Interest Rate

Your credit rating is a statistical estimate of whether or not you will pay back your future loans. It’s determined by your past financial history. If you default on a loan or don’t pay your bills on time, your credit rating goes down. If you have poor credit, you will find it more difficult to get loans, and your credit card interest rate go up even more. According to creditrating.com, if your credit score is 720 or higher, your interest rate should be 10 percent or less for your credit cards. You can find out what your credit rating is through credit reports and many places offer free credit reports.

Variable Rate Credit Cards

Variable rate credit cards mean that your credit card company can increase your interest charge. It usually happens when the Federal Reserve increases interest rates in general. If you’re not careful with variable rate credit cards, you could end up owing a lot more than you planned. Your credit card company may also increase your rates if you were late on a payment or were late with another debt, as the credit card company will consider you at higher risk for repaying what you owe.

In Conclusion

The APR directly affects the monthly amount of your credit card payments as well as how long it will take you to pay off your debt. Pay close attention to the rates you pay, and periodically evaluate whether you are paying the lowest rate available to you.