Credit > Interest Rates (1) Credit cards are not offered merely as a convenience to a consumer. The primary reason for their existence is to generate revenue for the financial institutions that issue them. Credit card companies are required to post interest rates in terms of an Annual Percentage Rate (APR). The APR that credit cards offer varies greatly and as a smart consumer, your main concern should be obtaining a card with the lowest possible effective rate of interest. There are laws, which vary state to state, that govern limits on interest and fees that credit card companies are allowed to charge. There are thousands of different credit cards offered, so be very selective and “mine your field of diamonds.” There are major differences in the manner in which interest can be compounded on credit cards. Compounded interest can significantly affect the cost of borrowing money. Interest can be compounded daily or monthly and there are different ways that credit cards calculate the balance on which the interest can be applied. Credit card debt is often called revolving debt because interest that is earned on a principal balance is added back to the balance on which interest can then again accrue. Simply put, the issuers earn interest on interest, which makes paying off the balance a very timely process and an uphill struggle. The following are interest calculation methods that can influence the effective rate of interest that a consumer pays. If the balance is paid on time every month, the method that issuers use to charge interest should not matter. If there is a running balance from billing cycle to billing cycle you should be aware of how your credit card calculates the balance on which interest accrues. Most creditors charge interest based on the average daily balance (including new purchases) method. Following is a summary of how they apply interest: |
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