We've all seen the commercials by credit card companies offering balance transfers or a low introductory APR. Maybe you've seen a credit card company offering prime rate or a fixed-rate. Below are some of the more common terms used by card issuers and what they mean for you.
Let's talk interest. There are several types of interest rates a credit card company may offer. Each of these are typically based on annual percentage rate (APR). The annual percentage rate is the amount is costs the card holder to use the credit card for purchases. As the consumer is billed monthly, a periodic rate, a fraction of the annual rate, is charged. But there are different types of APR offered by credit card companies.
Many credit card companies will offer an introductory rate that is either very low or zero interest for a certain amount of time, such as ninety days, six months, or one year. Once that initial period ends, the APR will change to a different type of rate that is generally based upon the card holder's credit rating.
A fixed-rate APR locks-in the interest rate for a certain amount of time, meaning that the rate can neither go up nor go down during that time as long as your account is open and in good-standing. A credit card holder may receive this type of offer either after the introductory rate period has ended or when the account is opened. A fixed-rate APR helps the consumer to determine exactly what their monthly minimum payment will be.
Many credit card companies only charge an APR based upon purchases you have made if you carry the balance over to the next billing statement or for a set amount of time after the purchase was made. What this means is that if you pay off the amount of purchases you have made before the interest-free period expires, you will not pay any interest on the balance.
Meeting the payment terms and staying under the credit limit (the amount of money you may use for purchases or cash advances), is of extreme importance. Credit card companies typically have a penalty APR set-up in your agreement which, if you miss your payment's due date, go over your credit limit, or your payment is returned by your bank, triggers an interest rate that is much higher than the introductory or fixed-rate APR. In many cases, notifying your credit card company of a payment that could possibly be late, explaining your circumstances, may help you to avoid this from happening. When speaking to the company's representative, record the date and time of your conversation, and ask for the name of agent identification number of the person with whom you have spoken.
Some credit card companies offer what is called an adjustable-rate APR. What this means is that the interest rate a credit card company may charge you for purchases and/or cash advances can go up or go down depending upon what type of index they use to determine the rate. These indexes are usually the prime rate, or the treasury bill rates. This type of APR can be beneficial when the prime rate is very low, but it is often difficult to know exactly what your minimum payment will be.
Credit card issuers may charge what is called minimum interest. Minimum interest is the minimum amount of interest you may have to pay on your balance. For instance, a purchase you have made may incur .50 in interest based upon the APR, but the credit card company may have a minimum interest amount of .00. This means that you will have to pay .00 in interest regardless of the APR on purchases.
Hopefully, this has helped to take some of the mystery out of the terms often seen in credit card agreements. Be certain to read the full agreement and understand exactly what is expected from you as the credit card holder.