Credit Cards have become a crucial part of people’s lives. There are excellent tools that let you finance out-of-pocket expenses without feeling the initial cost burden. Various banks offer Credit Cards, letting you borrow money up to a fixed limit. The card issuer generates a bill on a fixed date every month. This is known as the billing date. The bill includes the details of your transactions and the due date.
It is better to pay your Credit Card bill entirely on or before the last date of bill payment. Late or missed payments attract interest depending on the Annual Percentage Rate set by your bank. Hence, knowing about Credit Card interest rates and the factors that affect them is crucial.
What are Credit Card interest rates?
The Credit Card interest rate is charged by the card issuer on the sum you borrow using your card. This interest is usually charged when you carry a balance from one billing period to the next. It is calculated on the unpaid balance and added to your outstanding debt. Credit Card companies can also charge interest on transactions when you use your card to withdraw funds from the ATM.
The Credit Card interest rate is calculated according to the APR, which is calculated for the whole year rather than monthly. Although the APR is the annual rate, card issuers usually use it month-wise to compute the accumulated interest.
Factors affecting these rates
Credit Card interest rates are affected by the following elements:
- Type of Credit Cards
Credit Card interest rates can be influenced by the Credit Card you select. While some may have a fixed APR, others may have a variable APR that could change in the long run. Meanwhile, some Credit Cards may offer an introductory APR, which may be lower than the ongoing APR.
- Missing monthly payments
Missing your monthly Credit Card bill payments attracts late fees. It also results in a penalty APR. Consequently, it increases your overall interest liability. It is best to make your bill payments on time to avoid the cost of a penalty APR.
- Creditworthiness
Credit Card issuers use various factors to ascertain your creditworthiness. These include your income, credit history, and any other financial data. Issuers then utilise this data to determine your risk level and decide the APR they would offer.
- Change in credit scores
If your credit score decreases, the Credit Card issuer may consider you a credit risk. Consequently, they could increase your interest rates.
- Relationship with the bank
Your Credit Card interest rates could be affected by your relationship with the bank, and they can also vary between banks.
Conclusion
Credit Card interest rates vary due to various factors. Understanding these can help you manage your card responsibly and make informed decisions.