Understanding Credit Card Interest Rates

When talking about credit cards, the issue of interest rates always crop up. They are often dubbed the reason behind the spiraling debt of credit card users. However, this debt may actually be a result of not understanding what these interest rates are all about. By not understanding how huge the impact of these rates can be, people tend to underestimate them, which can lead to a ballooning debt in turn.

Here’s an overview of all the important credit card interest rates.

All about the Annual Percentage Rate

On a bank’s website, you’d often see low interest rates are advertised—for example, 1.5% per month. However, that’s 1/12th of the annual percentage rate or APR, the standard term for these interest rates. Most credit cards have APRs in the range of 15% to 20%. Hence, if you neglect to pay your credit card bills on time, it’s easy to see how a small debt can balloon to an unmanageable amount. Anything that’s unpaid after a set grace period will be subject to a finance charge.

Of course, that APR is not charged as one big amount at the end of the year. Yes, the 1.5% per month rate is true, but looking at the figure annually does help change perspectives. On top of that, banks vary in the way they put finance charges. For instance, some charge this on the daily credit card balance or the balance at the end of a billing cycle. Some credit card issuers may also include new purchases for finance charges or use the balance at the start of the billing cycle as the basis for these rates.

Cash Advances and Installments

With that said, the main APR only covers general transactionsbetween merchants (for instance, if you’re buying a new pair of shoes or paying for a subscription). If you’re planning to get a cash advance through your credit card, there’s often a separate APR for that transaction alone. And if you’re planning to transfer your balance to another credit card, then there will also be another APR for that. Thankfully, though, the APR of the balance transfer is often lower than the regular APR for a credit card.

On top of that, some banks offer special 0% installment promos by partnering with specific merchants. These promos, which are often offered at three- or six-month terms, allow you to purchase big-ticket items without being a big drain on your finances.

Yet, like the main APR, rates for cash advances and installments also vary from bank to bank. Hence, on top of checking the APR for a new credit card, you should also read the fine print and weigh the situation. After all, if you’re going to use that card for gadget shopping, installment promos can be a big plus. Or if you’re planning to switch cards, you may want one with an attractive balance transfer option.

As you can see, knowing more about the interest rates of your credit card can help you manage your finances better. So don’t let these numbers scare you—with a bit of analysis, you can avoid one of the pitfalls of credit card ownership.