Several factors that affect your credit card rates, but the most important include credit history, length of credit, debt-to-credit ratio, and employment history. Combined, these four factors can work to your benefit, or cause detriment to your Annual Percentage Rate, or APR.
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One additional factor affects your credit card rates, the Federal Reserve. The Federal Reserve monitors and controls federal funds and rates. This means, if they require an increase, it affects the entire market; all financial institutions that issue credit cards are faced with higher costs.
They recoup their losses by passing them to the consumer as APR percentage increases. Luckily, new legislation, in the form of the CARD act of 2009, prohibits credit card companies from taking advantage of high APRs and they must now provide advanced notice before an increase.
Twice per year, the Federal Reserve receives information from the credit card companies regarding their terms, including the APR percentage and type. Having access to this data can help you understand the average APR of each financial institution that issues credit cards, before individual credit is examined.
Reviewing your Credit History
To be eligible for the lowest APR credit cards, you must have a credit score of at least 700. Equifax advises most consumers with a credit score of 700 or higher display responsible credit management and carry a lower risk than others with scores that are below 700. The more your score increases, the lower your APR will be.
You should monitor your credit history once per year. If you log onto Annual Credit Report.com and enter your zip code, you can receive your credit report free. The process consists of completing a short form and submitting. Within a few seconds, you will have your report.
As you review your credit report, take note of all of the positive and negative entries. Make sure everything reported is accurate.
If you notice any errors, you must bring this to the attention of the three credit bureaus immediately.
Since your credit report contains your history, it is vital that you work towards removing anything negative so your credit score continues to rise. This will ensure that you receive a credit card with a comparable APR.
Types of Annual Percentage Rates
Typically, there are different APRs. You can be charged one rate for transactions and another for penalties, like paying late or defaulting. There are also introductory APRs that many credit card companies use to appeal to new customers. Finally, credit card cash advances and balance transfers may also carry different APRs.
Transaction APRs can start anywhere from 9.99% to 19.99%, depending on your current credit situation; this is the rate you are charged for all purchases. The majority of credit cards charge an APR of 0% when you pay your balance in full each month. If you carry a balance over to the next billing cycle, you will be subjected to the APR until the balance reaches zero.
Penalty APRs are applied if or when you pay your credit card bill late; generally, it applies after 60 days but you must review your disclosures and agreements for confirmation. If you start falling behind, your penalty APR, which is always higher than your standard purchase APR, will remain until your balance is paid.
The balance transfer APR can sometimes match the standard, transaction APR, for a period of time. Many credit card companies offer a 0% balance transfer APR for customers who are having difficulty meeting their current credit card APR. Using this option, allows for a transfer to a credit card with a lower APR which helps reduce overall debt.
Cash advance APRs are usually the highest, even if the credit card company does not charge fees, they will increase the interest rates. This means, if you exercise this option, you will pay back substantially more than your loan. Some credit card companies can charge up to 23% for cash advances.
Difference between Fixed and Variable Rates
All credit card APRs are based on a fixed or variable method. Deciding on your credit card should begin with examining these two very closely.
A credit card with a fixed-rate is specific and does not change. The conditions are outlined in the credit card company’s terms and agreements and unless a time frame is listed, the rates will remain the same throughout the lifetime of the account.
The variable-rate APR credit card changes, frequently. These rates are determined by factors not controlled by the credit card companies, but by the prime rates of the financial industry; the prime rates represent the average amount of interest that all financial institutions charge their lowest risk customers with the best credit. Based on this rate, your credit card APR can increase or decrease.
A special note to consider is many credit card companies since 2008 have begun to offer credit cards with both variable and fixed credit card rates. This is especially true for an introductory APR with a fixed-rate that changes after the period expires.
You can have a fixed-rate APR for six, nine or twelve months that applies to purchases or balance transfers, after the time-frame ends, the APR can change to variable while it remains open and active.
During your search for your low APR credit card, remember to take your time and review the terms and conditions very carefully. You have all of the information you need to make an educated decision that will result in the best credit card, with an APR that meets your requirements.
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