Credit card rates are the necessary evil of credit cards. They are one of the main ways that credit card companies make a profit. Credit card rates are also the main topic that users should be well versed in. Having a firm understanding of credit card rates is important to avoid crippling debt and a ruined credit score. Knowing about average rates, introductory rates and penalty rates are key knowledge to have.
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A user should have a thorough knowledge of credit card rates because they affect credit card users the most. Interest rates increase debt faster, and high debt decreases credit scores. Knowledge is power, and in term of credit card rates, knowledge is the power to have financial freedom.
How Introductory Rates Work
Introductory rates are promotional rates that credit card companies dangle in front of customers to persuade them to sign up. Also called teaser rates, these rates are well below average credit card interest charges. Introductory rates can be as low as zero percent, but they do not last forever.
The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 ruled that introductory rates must last for at least six months. While some teaser rates last as long as 15 months, rates jump up to much higher levels once the promotional period is over.
Credit card companies are betting that customers will lose track of when rates change or that they will have a balance remaining on the card when the introductory rate period ends. Balances that are carried over from a promotional period start to incur regular interest rate charges that are much higher. Those rates that take affect after the introductory period is over are those that would be considered average.
How Average Interest Rates Work
After introductory rates are over, the go-to rate comes into effect. Go-to rates have to be disclosed upfront to potential customers, but many are variable rates. Variable rates can change without notice if a national rate, such as the prime rate, changes. Credit card companies will pass the interest increase on to customers if the prime rate rises.
Go-to rates will vary depending upon your credit history. Those with a good credit score from on-time payments and smart credit usage will get the best interest rates. Those who have late payments have used a large percentage of their available credit or who have accounts in default will only qualify for high interest rates. Some will not qualify at all.
While go-to interest rates can vary widely, they can all be compared against average rates. Fox Business puts average consumer credit card rates at 16.99% for the end of February 2012. That rate combines the average rewards credit card interest rate of 17.83% and the average non-rewards card rate of 15.03%. Most credit card interest rates can be expected to be around the national average.
Penalty Interest Rates and How to Avoid Them
Credit card interest rates are pretty high considering that most home mortgage interest rates are below 5% and four-year car loans averaged 5.45% at the end of 2011, according to the Federal Reserve. However, those go-to rates are nothing when compared to penalty rates.
If you miss a payment, credit card companies generally bump your go-to rate up to a penalty rate. This interest charge can be as high as 29.99%. That’s almost $30 in interest for every $100 spent. Can you guess what happens if you miss a payment during that zero interest introductory period? Most credit card companies bypass your go-to rate and go right to the penalty rate, regardless of the introductory period.
Some credit card companies will resume your go-to rate after six months or so of on-time bill payments, but others will not. Some penalty rates are in force for good, making your credit card virtually useless due to the exorbitant interest rates.
Making on-time payments all the time, every time, is the only way to avoid penalty rates. Just one late payment could really affect your interest rate. That interest rate will start to generate some debt as your old balance starts to produce truly high interest charges. Furthermore, the higher your debt on your credit card goes, the closer you get to your credit card spending limit. Using more than 75% of your available credit will start to negatively affect your credit score, making it harder to get new credit or lower rates.
How to Avoid Paying Interest All Together
No one has to pay interest on a credit card if they don’t want to. Pay off your full balance during the grace period, and your credit card company can’t charge you interest. Every credit card company must be upfront with the length of grace periods, thanks to the Credit CARD Act. If a card has a grace period of 21 days, then you have 21 days after making a purchase to pay it off in full to avoid interest rates. Usually, if you wait until the bill is due interest has already been added.
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