Every credit card is subjected to interest rates. The interest rates are charged if you do not clear the full credit card balance or pay just the minimum amount due (MAD). Credit card interest rates generally range from 2.5% to 3.5% per month. However, this may vary for different issuers and card grades. Here are a few aspects that everyone should know about credit card interest rates.
Calculation of Credit card interest rate
Generally, the credit card interest rates are calculated on a yearly basis and this is known as Annual Rate Percentage (APR). It charged on the balance for a year. However, the credit card issuer may charge on the outstanding dues per month through Monthly Rate Percentage (MPR). Every bank has its own system of calculating credit card interest rates using APR and MPR. The rates of APR and MPR also varies from bank to bank. In some cases, APR varies for credit cards from the same bank if the credit card grades are different. The interest rates for your credit card is also directly linked to your credit score.
Types of interest rates applicable for credit card
The two basic categories of credit card interest rate are fixed and variable rates.
- Even though the name suggests it to be fixed-rate, this interest rate may still change under specific circumstances. But the bank must notify you about the change in interest rates beforehand.
- Variable-rate is the interest rate that is followed by most credit cards. This interest rate is linked with an index rate (say, prime rate) and varies according to the change of the index rate.
Factors that influence credit card interest rates
Credit card, credit card interest rates, credit score and credit history are all inter-linked. Thus, there are certain factors that influence credit card interest and consequently the others.
- Paying only the minimum amount due (MAD)
- Missing monthly payment of credit card
- Paying less than the MAD
- Withdrawing cash advances
- Carrying forward the outstanding amount to the next billing cycle.
These activities can lead to a hike in your credit card interest rate. Moreover, if your credit score decreases due to some other reason such as delay in paying loans of EMI, application for new credits, etc., it can affect your credit card interest rate as well. Lower the credit score, higher is the increase in the Annual Rate Percentage (APR).
The most interesting part of credit cards is that you can avoid paying credit card interest. Every bank provides a free or grace period to its credit card users. This period starts from the day you used the credit card to make the purchase and ends on the due date assigned by the bank. If you clear the outstanding amount within that period, no credit card interest rate is levied on the amount.