What is the most prominent thing on any credit card ad? It is the credit card rate or the ‘APR’. The credit card rate is the most publicized feature of a credit card. A lot of people just compare the rates between cards and go for the one with the lowest rate at that time. While credit card rates are probably the most important factor in deciding between cards there are also other factors to consider, but a good understanding of credit card rates is essential to getting a good deal.
So what is a credit card rate? Put simply the credit card rate is the rate of interest that the card supplier will charge you on the amount that is owed. These interest charges only occur if the full payment is not made by the due date on your statement. When you receive your credit card bill it will specify the full amount owing on the card and also the minimum payment that you must make by a certain date. You have the option of paying the full amount and incur no interest charges or making the minimum payment shown. If you decide to make the minimum payment or any amount that is less that the full amount the credit card supplier will charge you interest based on the interest rate and amount owed. The interest rate will be the rate that was applicable at the time that you applied for the card.
The credit card rate or Annual Percentage Rate is as stated, an annual interest rate charge. The card supplier uses this annual interest rate to calculate the monthly interest rate charge and then calculates the amount of interest on the balance amount that you owe them at that time. The balance amount is equal to the full amount owed minus any payments made by you. The resulting interest is added to your balance for the next month (at the time of the next billing cycle). If you make another part-payment the new balance is calculated again and the monthly interest rate is applied to that amount for calculation of the new interest charge. This cycle continues until the amount is payed out in full.
That is the basics of how the credit card rate works and explains why the credit card rate is such an important consideration when searching for your new credit card.