Credit Card Rates: Six Things to Know About Interest
If you're one of the thousands of consumers who carry credit card debt from month to month and whose credit card interest rates were hiked last year, you know how important those rates can be to your financial status.
Although new federal credit card regulations provide some consumer protections, it's still vital that you understand how credit card interest rates work. It's a little more complicated than you think. Here are six points to know:
1. Variable Versus Fixed Credit Card Rates
A growing number of credit cards have variable interest rates, which are tied to an index, such as the prime rate. The credit card company adds a margin, and the rate you pay equals the index plus the margin. Your rate goes up as the index rises, so plan carefully.
2. More Than One Credit Card Interest Rate
When shopping for credit cards, most consumers zero in on the interest rate on new purchases, and many don't realize there are different rates on balance transfers and cash advances. Moreover, most credit card companies don't offer a grace period for cash advances, so interest starts accruing as soon as you swipe your credit card through the ATM.
3. Interest Rates Depend on Credit Score
That low rate advertised prominently might not be the one you get if you have a mediocre credit score. You might end up getting approved for the card, but at a higher interest rate.
4. Higher Credit Card Interest if You're Late
Credit card companies can't hike interest rates on existing balances unless you're more than 60 days late with a payment. Then penalty interest kicks in, not to mention a late fee. Pay your bills on time to avoid outrageous interest rates.
5. Don't Like a Proposed Interest Rate? Opt Out
New credit card rules require credit card companies to give you 45 days notice before they increase interest rates on new purchases. They must also give you a chance to opt out of the account if you think it's a bum deal.
6. No Interest Rate Hike in the First Year
Your credit card issuer can't increase the interest rate on new purchases during the first year of an account, unless an advertised introductory rate has expired or you're late on payments.
Interest rates are a central feature of credit card deals. Keep these facts in mind as you shop for credit cards and manage your financial life.
Published 04/22/11 (Modified 06/27/14)