If you are like most people, you are currently carrying a balance on your credit card or cards. The average person is currently carrying over $6,000 in credit card debt and the figure is rising. While there may be legitimate reasons for having a credit card in your wallet, there are many more problems and pitfalls. Understanding credit card interest and how it affects you as well as the proper ways to leverage credit will enable you to positively benefit from this form of consumer debt.

Credit Card Interest

Credit cards are issued to a variety of borrowers based upon their credit history and financial ability to repay the amount lent. Finance charges from a credit card company are divided into annual percentage rate (APR) and monthly periodic rate.

The APR is the interest rates that the consumer will pay over the course of an entire year on the amount lent and is expressed in the form of a percentage. The APRs offered will range drastically and are often based upon a consumer’s current credit score, as this score is considered to be a signal of the risk of default in the eyes of the lender. It is important to understand that the actual rate that a consumer pays is often much higher than the stated APR because most lenders compound the interest monthly. Consumers should expect that the actual interest that they pay annually to be 2-3% higher than the stated APR.

A monthly periodic rate is the charge that is paid in addition to the stated APR. Common additional rates or fees can include over the limit fees, late fees, membership fees, transaction fees and cash advance fees. Consumers should read their terms and conditions information closely to determine what possible fees could be added to their card’s balance on a monthly or annual basis.

The interest rate offered for a credit card can generally be changed without notice by the credit card company. The most common causes for changing the credit card’s rate are late payments, over the limit balances and rising reserve bank interest rates. Credit card companies do list the maximum allowable interest rate in their terms and conditions and this should be reviewed prior to becoming a card holder.

 

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