The most common credit card rates for finance charges ranges anywhere between 15% and 20%. This seems high considering the amount of interest the banks charge each other is only 3.25%. However, before you judge, you must first understand how credit card rates work according to the financial industry.
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The reality is credit card companies can stand to lose thousands of dollars by issuing you a line of credit. They must have some security to ensure their losses. Finance charges within the average range help to increase revenue for their companies.
Unfortunately, the Annual Percentage Rate, or APR on finance charges has increased slightly, from 14.75% to 15% over the past year. Many are concerned that these rates will continue to increase, even in light of the new federal rules. Consumers have been assisted in many ways, but the impact to finance charges is minimal.
For example, credit card companies can no longer raise your interest rates on new accounts during the first year. But, if your credit card has an introductory APR, you may not qualify. Variable interest rate credit cards are out too. However, the credit card companies must provide advance notice before they increase your APR and this is positive.
The main rules for APRs involve increased communication and consumer awareness, but the information is still very useful and important to have available. A quick review of the content provided by the Federal Reserve clearly shows how the finance charges for credit cards can use improvement.
Typical Credit Card Fees
In addition to credit card finance charges, there are other fees to be aware of, like cash advances and balance transfers. All major credit cards offer these options and they each have separate fees associated with them.
For instance, cash advance fees are usually high; you can pay as much as 3% to 5% for withdrawing money through an ATM or bank teller. This is on top of the fees for each of these methods.
Your credit card company has no control over the fees banks charge so they become your responsibility as well.
Balance transfers are more forgiving. The fees for balance transfers are often waived on new accounts, at least for the introductory period. This is one of the ways the credit card companies entice consumers into accepting their offer. After the expiration date, balance transfers can be a specific rate, such as $25 to $30 or a percentage is assigned.
There are several credit card companies that offer free balance transfers as a permanent option, but this is generally on the APR attached, not the fee itself.
Late Fees and Over Limit Fees
This is an area where the CARD Act shows teeth. Late fees have been capped, permanently. In the past, late fees could skyrocket. Now, regardless of the minimum amount due, your late fee cannot exceed $25. Additionally, your late fee must never exceed the amount due. There are stipulations, this applies to consumers who are current with their credit card payments and have not defaulted.
Exceeding your assigned credit limit is no longer as frightening either. The over limit fee has been revamped as well. Previously, it was very difficult to get out of debt once you maxed out your card. The over limit fees would continue to accumulate on every purchase. Today, this is restricted. Your credit card company can only charge you for the first transaction, never any additional.
Qualifying for Competitive Offers
To qualify for the most competitive credit card rates, you must have a good credit score. Good is described as a score of 700 or more, with a credit history of at least five years. Your credit score is a combination of a few factors. If you are just starting out and have not established enough credit, you may want to apply for a secured credit card instead. They also help rebuild tarnished credit.
Most secured credit cards report to the three credit bureaus. As you maintain your credit card account, you can start showing improvement in your overall credit score. Continue to access your credit report every year. With careful and responsible management, you may begin to see offers arrive from unsecured credit card companies.
Credit card rates are not as difficult to understand as many think; at times, they can be challenging times, but overall the concept is very elementary.
Once you see how interest rates affect your entire credit card experience, you should learn how to manage your accounts easily and effectively.
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