September 15, 2010

• Getting To Know Your Credit Card, Pt.2
     Interest rate; keys to success.

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  Prior to new credit card reform legislation, most cards carried a fixed rate APR. However, since the signing of the new law, most lenders have switched card accounts to variable rates. Variable rates fluctuate as prime rate goes up and down. This credit card interest rate system sets a rate that is added to prime rate. Contract wording with variable rate accounts typically read something like: prime rate plus an additional percentage which varies with each contract. Interest rates can vary on the same account depending on how the money is borrowed. Cash advances typically have higher interest rates and promotional rates are lower and expire after a designated time frame. Balance transfer promotions that offer zero percent interest usually look good, but typically come with a transfer fee of 3 to 5 percent of the balance being transferred. How do these interest rates affect the way lenders calculate your credit card interest?

  Lenders calculate interest on the balance of your account after the first credit card billing cycle. If you pay your account off in bull each month, you should never pay interest. However, if you make the minimum or any other payment toward the balance, you pay interest against the remaining balance in the following month. If you continue to make the minimum payment due each month, it could take you as long as five years to pay the balance off. New legislation requires credit card companies to indicate on the front of your monthly statement the length of time it will take you to pay the balance off if you only make the minimum payment due. If you are not able to pay you balance off in full each month, you should always pay more than the minimum payment due in order to expedite paying your debt off in a more reasonable time frame.

  Understanding your credit card contracts and how interest rate affects your debt should be a primary concern for all cardholders. If you continue to be confused about how it works or if your bill does not mirror your calculation and expected interest charged, notify your lender and have them clarify the information. Remember, banks make mistakes too.
  
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