Credit cards are a convenient form of payment. One swipe and the payment is complete. However, a few weeks later the bill comes due, with interest. While it is beneficial to be able to space payments out over time, the more months you take to pay, the more you will pay in interest rate charges. Different cards have different rates, terms, and fees, so it is important to compare the actual cost of any credit card.
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Comparing credit card rates involves three factors: introductory rates and terms, annual fees and your ability to pay on time. These factors will affect your credit card’s rates in the short and long term.
Why Introductory Rates are Important
An introductory rate on your credit card, sometimes referred to as a teaser rate, is a strategy used by credit card companies to attract customers. Also called promotional rates, they offer 0% interest or some other low interest rate to get customers to sign up. The kicker is that the introductory rate does not last forever. While the Credit Card Accountability, Responsibility and Disclosure Act of 2009 decreed that introductory rates must last at least six months, after that most cards revert to a go-to rate that is usually significantly higher.
An introductory rate can certainly make one credit card seem superior to another, but they can lull you into a false sense of security.
While some introductory rates last as long as 15 months, any charges remaining on the card will start to be billed at the higher rate. Furthermore, if you have a late payment during the promotional period, that low, introductory interest rate jumps to your go-to rate or higher.
What You Should Know about Your Go-To Rate
After the introductory period is over, your credit card’s interest rate will change to the go-to rate. This is your credit card’s true interest rate or annual percentage rate (APR). How low your APR is depends up how good your credit history is. The higher your credit score, the lower go-to interest rate in which you will qualify. Consequently, a low credit score will result in high interest rates.
Fox Business listed the average U.S. credit card interest rates for the end of February 2012 as 17.83% for credit cards with rewards and 15.03% without rewards. Comparison in the simplest terms, not taking into account fees or introductory rates, an interest rate of 17.83% will incur $17.83 in interest fees for every $100 borrowed, and a 15.03% rate will cost $15.03. Adding in membership fees or introductory rates can complicate the calculation of credit cards’ rates and true cost for comparison purposes.
Furthermore, many credit cards have a variable interest rate; it changes with national rates, such as the prime rate. If the prime rate goes up, credit card companies pass that cost off to customers by raising their go-to rates.
Other Rates and Fees that Increase the True Cost of a Credit Card
Many credit cards have additional fees that are mandatory. Late fees can be avoided with on-time payments and credit card companies cannot charge you a cash advance fee if you don’t get cash advanced from your credit card. Annual fees are mandatory if your credit card charges them, and they increase your credit card’s true annual rate.
SmartMoney.com has a calculator that allows users to compare credit cards while factoring in an introductory rate, the go-to, or original rate, an annual fee and the balance carried on the card. The calculator allows users to compare credit cards apples to apples.
On top of that, customers can also incur a penalty interest rate if they have a missed payment. This penalty rate can be as high as 29.99%, creating a large amount of debt very quickly. It doesn’t matter how low a credit card’s rate is if you can’t make the payments, most penalty rates will not revert to the go-to rates once they are in effect. Another calculator at SmartMoney.com will allow you to figure interest payments based on different rates and different monthly payments.
Finding the Lowest Credit Card Rates
First, getting the lowest rates can only be achieved with good credit scores. Credit card companies will only give those with long credit histories of on-time payments the truly low interest rates. Next, credit card users must use their credit responsibly by only buying what they can pay back.
Late payments and drawn-out payments both increase interest amounts.
Furthermore, researching the terms and conditions of multiple credit cards with the FREE credit card chaser tool is the best way to weigh one credit card against another.
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