Absolutely not! While the average annual percentage credit card rates continue to hover in a narrow 13% to 17% range, there is typically a 30 point spread in the marketplace. That means that your credit card company could be charging you anywhere from 0% interest to 30% interest, each month!
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The recent economic recession and global banking crisis have forced banks and other credit card issuers to dramatically revise their credit policies in the last few years. Competitive fixed interest rate credit cards have all but disappeared, to be replaced by variable rate cards. These new credit cards may feature low attractive rates to start, but can and will go up in the near future.
Rates Subject to Change
If you do have a credit card or two in your wallet with attractive APRs, don’t get too comfortable with them because they’re going to change!
Most all consumer credit card accounts now feature variable interest rates based on a banking index rate such as the U.S. bank prime lending rate, currently at 3.25%.
For most consumers, this means that once each year your bank or credit card company will review your credit card account and set your interest rate for the next 12-month period, per the terms of your credit card agreement. This involves adding a margin or mark-up of 8 to 10 points to the raw index value.
For example, let’s say that your bank is currently charging you 11.99% APR on your unpaid credit card balance each month. If by 2013 the prime rate increases to 4.50% and your credit card margin is 8.74%, when your rate changes your new APR will be 13.24% for the next full year.
Interest Rates Matter
No matter what sort of premiums and rewards your credit card offers, if you maintain a revolving balance on your card you will pay a significant amount of interest over time. Average credit card interest rates for March 2012 are at 16.87%!
Consumers with traditional non-rewards credit cards are paying an average of 15.03% on their outstanding balances, while the average APR for rewards cards is a whopping 17.66%! Small changes in interest rates can mean big payouts for cardholders over a period.
The Federal Trade Commission, in the interest of protecting American consumers, publishes many helpful facts and tips regarding credit card usage. The FTC website, includes a handy credit card repayment calculator.
Plug in the credit card balance and interest rate and the FTC tool will calculate the amount of time necessary to pay off the debt if you are only making minimum monthly payments of 5%. A balance of $3,000, at the current average rate of 16.87%, will take 7 years to pay off!
This includes $1111 in interest payments and assumes no new charges will be made! If your credit card rate interest rate were just two percentage points lower, 14.87%, the total amount of interest payments would decrease to $937, a savings of $174!
To pay this balance sooner, say in three years, you would need to increase your monthly payments to $107 per month. At 16.87%, you would still be paying a total of $844 over the 36-month term. This example also assumes that your interest rate won’t increase again!
Premiums and Rewards Can Make a Difference
Factor in cash back premiums and other credit card rewards and you will be saving money over time if you use your credit cards wisely. But as we’ve seen, the average interest rate for rewards cards is almost a full percentage point, .79%, higher than non-rewards cards. This fact alone should encourage consumers to pay off their credit card balances each month, when possible.
In fact, according to research conducting by PBS, the Public Broadcasting System, 38% of Americans do indeed pay off their credit card balances each month. However, 24% of cardholders make only minimum monthly payments.
The Frontline report, concludes that the other half of American credit cardholders fall somewhere in between. It’s easy to draw conclusions when looking at the PBS study.
It pays to shop for the lowest interest rates when looking for a new credit card. Managing your cards well and not letting balances get out of hand will pay huge dividends over time.
It’s also important to remember that the savings gained by a two, three or even five percent cash back reward on credit card purchases can quickly be lost when your bank is charging you 16% or 17% interest on those same purchases each month.
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