Understanding Credit Card Interest Rates

So you've got your credit card, it's time to hit the shops. Well, maybe not just yet. Having a credit card makes shopping much easier, but can also easily allow you to overspend, and then you end up getting charged interest. If you haven't done so already, take the time to understand exactly how interest works before you use your card, and read this article.

Credit cards are not there for you to endlessly spend other people's money, despite many users' apparent understanding that they are. What they are however, is a method by which to spend your card company's money, as well as a promise to pay they back at some point, termed on your statement as the payment due date. If it is possible, you should pay for your entire bill as soon as it comes through, as it avoids interest, although sometimes you may not be able to do this, particularly if you've just bought something very expensive. When this happens, the card company will charge interest on the outstanding money, which is effectively a fee for borrowing their money for longer than they would like.

With most cards, what is really the annual percentage rate (often abbreviated to APR) is quoted as the interest rate for that card, although strictly this isn't correct. This is because the monthly periodic rate is charged each month for what is outstanding and is the APR divided by 12. However, this is not only applied to what you have accumulated this month, but also what is still unpaid from previous months, which is called compound interest. This means that the interest you will be charged is actually higher than the APR, but quoting them as the same is a sneaky way of the card companies tricking us without actually doing anything wrong, as they are kind of the same thing!

Some card companies will not charge interest for a limited time, or maybe just a small amount of interest, but 0% APR for the first 6 months is becoming increasingly common. This is done to draw in new customers, as most people will stick with the card after the introductory rate runs out, but remember to check what the new rate will be before you sign up.

It is also very important to know whether your card's interest is charged on a variable or fixed rate. The difference is quite self explanatory, fixed doesn't change (at least not without notice), and variable will go up and down with market trends and the base rate of interest. It is usually better to go with a fixed card, even though it may seem slightly more expensive.

Although you should now have a good understanding of how interest works, it is best to never have to use this knowledge, as paying off all of your balance each month is the best way to go forward.

Find yourself a low APR card today.