Interest Rates for Credit Cards
One of the most important criteria for choosing a credit card is the interest rate it offers. The only case when the interest rate is not important is when you plan to repay your balance in full at the end of the period but even if you are able to impose discipline over your spendings, force major occurs and you might not be able to repay your balance in full and as a result of this you must pay interest.
With so many offers for credit cards, there are really nice packages that combine a low interest rate, a long introductory period and a high credit limit. But the problem is whether you qualify for them or not. Because some of the really good credit card offers demand really good credit report, very often one has to make choices among the realistic options. And one of the things to watch out for are the interest rates.
Basically, there are two types of interest rates – fixed and variable. The advantage of fixed rates is that you know in advance how much you will have to pay in the form of interest. It is predictable. On the contrary, with variable rates, the interest rates go up and down, usually following the Federal Reserve's Primary Lending Rate. If the Primary Lending Rate goes down, as it was in the early 2000s, then a variable rate is better for you but if the rates go up, then a fixed rate is preferable.
Very often there are different rates for the introductory period (also called grace period) and for the period after it. So, if you see a credit card advertised as 0%, do not get fooled that the interest rate will remain zero for a lifetime. Instead, pay attention to how much the rate will soar after the introductory period is over. Very often it is much better to get a low-interest rate credit card with fixed interest rate for the next couple of years, than a zero card with an interest rate of 20% after the end of introductory period. This consideration is especially important if you plan to make large purchases and you will not be able to repay all your balance in full by the end of the introductory period.
When you have credit card debt to repay, another important consideration, in addition to interest rates, is the period over which you will repay it. The basic rule is that the longer the period, the more you will pay in interest. So, even if your interest rate is low, but you repay your debt over longer periods of time, you will end up paying more than if the rate were higher but you were paying larger monthly payments. And sometimes the difference is striking, as you will see from the next example.
Probably mathematics was not your favorite subject at school but when it comes to calculating money that will go out of your pocket, some mathematical skills are always welcome. Well, don't worry that you will have to mess up with complex mathematical formulas. You won't – there are so many calculators on the Web to do the grunt work for you! But you must be able to understand the results they deliver.
Let's look at the following example. Your balance amounts to $1,000. You consider two variants - repaying it in minimum payments over a longer period of time and repaying it as soon as possible in higher payments. The options you have are a credit card with 12% interest rate and another with 18%. We presume that the annual fees for the two cards are equal, so we can skip them in the analysis and that you do not incur any new debts in the meantime.
As you see, the difference between 12 and 18% is considerable, no matter for how long you will repay your debt. The reason is that each month the principal is increased with the amount of interest rate and because of that you pay so much interest at the end. But there is something else that is interesting – the amount of interest you will pay when your rate is 18% per cent but you make larger monthly payments is more than twice lower than the amount you pay at the lower interest rate but with smaller payments. So, as a conclusion – when deciding on which credit card to get, consider its interest rate but even if your interest rate is low, having a large balance that you fail to repay over longer periods of time, pumps enough money out of your pocket!