Secrets of Credit Card Rates Revealed
If you have one or more credit cards, you are not alone. In the United States today, 640 million credit cards are in circulation. That’s two credit cards for every man, woman, and child. The average American adult has four credit cards, representing an increase from 3.2 cards each in 2004. On average, 40% of Americans pay their credit card bill each month while 60% carry a credit card balance. Based upon Federal Reserve figures, total U.S. credit card balances are 0 billion.
A credit card is basically a short-term loan from a bank to the card user. Banks are in business to make a profit, and credit cards have traditionally been very profitable. Aside from membership or annual fees, banks make money on credit cards by charging interest. The interest rate is represented by a percentage of the principal owed, and is calculated periodically. The result is the finance charge that appears on the cardholder’s monthly bill.
The Annual Percentage Rate (APR) can vary greatly among different cards. Currently, APRs on credit cards average 14.41% for cards with rewards, and can go as low as 8.9% and as high as 36%. There is no federal limit on the interest rate a credit card company can charge.
How do lenders calculate finance charges? Finance charges are calculated by applying a Periodic Interest Rate to the outstanding balance of the credit card account. Because the balance changes every time a customer makes a purchase or sends in a payment, there are many methods that banks use to calculate average balances. The periodic rate is calculated by dividing the annual percentage rate (APR) by the number of billing periods in a year, which are generally twelve. An APR of 21% would convert to a periodic rate of 1.75% (21 divided by 12 = 1.75) per billing period when finance charges are calculated monthly.
The periodic interest rate is then multiplied by the balance to determine the dollar amount of the finance charge. The balance can be computed in a variety of ways. Say a customer has a balance of ,000 at the end of the month on a card with an APR of 22.5%. If the credit card company used a simple end-of-month calculation the interest charge would be ,000 x 1.875% = .25.
This means that aside from other charges and fees, the customer will pay the card company .25 on the ,000 that he or she has borrowed during the month.
How can you lower your interest rate? The best way is to be a good credit risk. Credit card companies have recently begun to calculate customer’s interest rates not only on the customer’s history with the company, but also the customer’s overall credit rating. This practice is called the “universal default” clause, and it’s becoming a standard clause in credit card contracts. Even if you make your credit card payments on time, the credit card company can raise your interest rate if you’re late on payments elsewhere. If your payments are late with another credit card company or even if you’re late with your phone, car, or house payment, the bank can raise your credit card rate. Your credit score–known as a FICO score-is critical to determining how much you can borrow. It is a major factor in determining the interest rate you pay on a credit card.
Your credit card company can hit you with expensive fees, too. In 1996, the U.S. Supreme Court in Smiley vs. Citibank lifted restrictions on late penalty fees. Consequently, there is virtually no limit on the amount a credit card company can charge a cardholder for being even an hour late with a payment.
You have nothing to lose if you call your credit card company and ask for a lower rate. Always read the fine print on your credit card agreement. Above all, whatever rate you have, never charge more than you can pay off in full each month.
© 2008 Thomas Hauck Communications Services
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