When you see an advertisement for a credit card, what would you say is the most prominent selling point? If you said the credit card interest rate you would be correct (also known as the APR). The truth is that credit card interest rates have by far the most attention or publicity placed upon them. When consumers are searching for a competitive credit card, this is often where they make their first judgments. They will simply compare various credit cards and their corresponding credit card interest rate and choose the card offering the lowest APR. While there should be many factors to consider when comparing credit cards, most people tend to focus on this very important aspect. And understandably so…it is a fact that credit card interest rates are a highly important factor when selecting the credit card of your choice. Considering this, a better understanding of the credit card interest rates should be considered necessary.
First things first. What exactly is a credit card interest rate or APR? Put in simple terms, a credit card interest rate is the interest amount that a credit card provider will charge you, calculated on the amount that you owe the company in question. If you don’t make full payment in time, then you will be charged an interest amount based on your balance amount.
So lets break this down a bit further:
Your credit card bill arrives…it highlights the complete amount that is owed, and also indicates the minimum payment that must be paid by a certain date.
To avoid being charged any late fees or other such penalties you choose to make this minimum payment. Of course you may also choose to pay the full amount owing in which case no interest would be charged.
If you choose, however, to only make this minimum payment, or any other amount that is less than the entire amount, then the credit card provider will calculate an interest amount based on the credit card interest rate and the amount of the balance owing. This credit card interest rate will be the rate which was agreed to when you went through the process of the credit card application. The annual percentage rate or the credit card interest rate, is quite obviously an annual rate of interest. Your credit card provider will use this annual credit card interest rate to make a calculation as to the monthly interest rate, and then to use the balance owing to calculate the interest.
Remember that the balance owing is simply the full amount that you owe, less any payment you have made. The interest that has been calculated is then added to the balance for the following month. When you once more make a partial or minimum payment, then the new balance will be calculated and the monthly credit card interest rate will be applied to calculate the new amount of interest, and so it will continue this way until a full payment is made on the entire balance owing.
As you can tell, this can be seen as a continuous cycle until full payment is made. Many people often refer to this as the vicious credit circle. A balance owing will continue to increase even if the minimum repayments are being made. In light of this hopefully you can see the fundamental role that credit card interest rates have when the interest amount is being calculated. And also why credit card interest rates should be considered one of the most important factors (amongst other things) when choosing a credit card.
