Credit Card Rates And APR’s

Credit Card Rate

What’s the thing that is most prominent on any credit card ad? Well, it’s the credit card rate (or the APR, as we know it). The credit card rate is the most publicized thing in the world of credit cards.

A lot of people just compare the credit card rate of various credit cards and just go for the one that is offering the lowest credit card rate (or APR). Credit card rates are, in fact, one of the most important factors in the selection of a credit card (though not the only factor). Therefore, a proper understanding of credit card rates is even more necessary.

So, what is a credit card rate or APR? Very simply, credit card rate is the rate of interest that the credit card supplier will charge you with on the amount you owe them. The credit card supplier will charge you an interest only if you don’t make full payments in time.

Annual percentage rate (APR) is an expression of the effective interest rate that the borrower will pay on a loan, taking into account one-time fees and standardizing the way the rate is expressed. When you receive your credit card bill, it specifies the full amount you owe the credit card supplier. You have the option of making either a full payment or just the minimum payment. This credit card rate is the interest rate that you agreed with them at the time of applying for the credit card. The credit card rate or the annual percentage rate, as is obvious, is an annual interest rate.

The credit card suppliers use this annual credit card rate to calculate the monthly credit card rate and then they calculate the interest on the balance amount that you owe them.

The balance amount here is simply = Full amount – (payment made by you). This interest is added to your balance for the next month (at the time of next billing cycle). If you again make a partial payment, the new balance is calculated again and the credit card rate (monthly one) applied to it for calculation of new interest; and it keeps going on and on until you make the full payment.

You may want to check out a secured credit card or credit card merchant information here.

If you own a credit card and you carry-over balances from month to month then you’ve got that amazing force called compounding interest working against you.

In this article, We’ll attempt to explain how this “force” works against you month after month after month, in the form of interest upon interest. And perhaps, by helping you to gain a better understanding of how this “force” works and how important even a small change in the interest rate you are being charged effects you and families financial future. And hopefully, it will also inspire and motivate you to do whatever it takes to pay off your credit cards and initiate some type of savings plan so you can put this “force” to work for you.

Credit Card Interest Rates are Compounded

The interest you pay on your credit card balances are compounded, which means that you pay interest on the interest from the month before. A simple example would be that if you were being charged an interest rate of 2% per month, you would not be paying 24% per year. In reality, you would be paying 26.82%. A neat little trick that credit card companies use to pick up an additional point or two of interest is to calculate interest on a monthly rather than on a yearly basis. You pay more but you don’t know you’re paying more.

A Brain Teaser

Here’s a little brain teaser based upon what you’ve already learned. Would you rather have $1 million in cash or $10,000 in some form of savings account earning you a compounded interest rate of 20 percent per year?

Not a bad return on your investment of $10,000 but on a side note it also exposes another lesson in how the compounding rate of inflation destroys wealth but that’s the subject of another article.

Clearly, that question was a bit tricky because there’s so many variables to take into account that would influence what decision you would ultimately make – but you get my point, the power of compounding interest and by the way… it’s the primary way credit card companies make their money is a powerful “force”. It’s also the way pensions work and the reason the prices of things seem to rise massively as you get older. Be afraid… or at the least very wary of compounding interest.

Compounding Interest Can Really Add Up

Now, let’s look at a more real world example. Let’s say you have an average unpaid balance of $1,000 on a credit card with an APR of 15 percent.

First year interest would be $150. As you can clearly see, after just five years at 15%, you would owe double what you borrowed and after 10 years you would owe four times. I know it’s hard to believe but once again this simple “real world” example dramatically demonstrates the power of compounding interest.

If you let something like that carry on long enough, you end up paying on that same amount of debt for years and years and end up paying back many times what you originally borrowed and in some instances you still may not have completely satisfied the original debt.

The Three Percent Difference

You may feel that there’s not that much difference between a credit card that charges an APR of 15% versus one that charges an APR of 12% but then again after reading this article I’m sure you’ve realized that there is and so – that’s exactly what I’m going to show you. After the same five year period you would have saved nearly $250 or almost 25% in interest from a mere 3% difference in APR. Quite dramatic and hopefully it will help you convince you to make the necessary decisions to pay-off your credit cards and start saving so that you can put, “the greatest mathematical discovery of all time” to work for you… rather than against you.

You may want to check out secured credit cards or credit card  application information here.