subject: Understanding Credit Card Interest Rates [print this page] Credit cards have become a staple in American society. This is why it is astonishing to me that so many Americans are under-informed regarding these pieces of plastic! It seems as though the part of charge card accounts that Americans don't quite understand is the APRs on them. Interest rates are pretty simple to understand. They are how the banks make money when loaning money to consumers through credit cards.
When people use their credit card accounts, the amount borrowed will be added to the total balance on the credit card. However, the balance on a charge card account is usually made up of separate sections. This is where the APRs tend to get a bit confusing for consumers. Each section of the balance on a charge card account will be charged a different APR. Here are the most common types of interest associated with credit card accounts:
Standard annual percentage rate: The standard interest rate on a credit card account is also commonly called the purchase rate. This is because this is the APR that consumers will have to pay on balances accumulated by using the charge card for standard purchases. These standard purchases include things like gas, food and entertainment.
Introductory APR: Because of the overwhelming competition in the credit card account industry, banks have been forced to come up with new ways to attract clients. One of these ways is by providing introductory interest rates with their credit cards. Introductory APRs are interest rates that take effect the day the account is opened and will generally last for 6 to 12 months. In rare occasions, Americans will be able to find charge card accounts like the Discover More Card - 18 month balance transfer promotion where the introductory APR will last for longer than 12 months. Introductory annual percentage rates are usually between 0% and 2.9% and once they expire, all balances accrued during the introductory period will then be charged the standard APR for the debts.
Balance transfer annual percentage rate: The balance transfer annual percentage rate is another that came about due to overwhelming competition in the charge card industry. There are some special charge cards that allow consumers to transfer a balance from another credit card to them. These balance transfer charge cards will come with a special interest rate called the balance transfer annual percentage rate. This is the rate of interest that consumers will pay for balance accrued by using their credit card account for balance transfers.
Cash advance annual percentage rate: The cash advance annual percentage rate is usually one of the highest APRs on a credit card account. The cash advance annual percentage rate will be charged to balances accrued by using charge cards for cash advances. A cash advance is any transaction where the consumer gets cash back. These transactions can take place at an ATM, over the phone or even at the point of sale in many stores.
Default APR: The default annual percentage rate is the highest interest rate on a credit card account and one that people should generally try to avoid. The default interest rate takes effect only if the consumer defaults on their credit card account. Once the consumer defaults, all balances will be charged the default interest rate. Some ways this can happen is by making late payments or spending more than the credit limit on the credit card account.
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