Comprehending Credit Card Interest Rates- A Lesson in Futility?

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Comprehending Credit Card Interest Rates- A Lesson in Futility?

Credit card interest rates can be "downright confusing".   Therefore, a little education goes a long way when it comes to comprehending card rates.   Most of the low rate credit cards offered today are variable rate cards.   This means the APR is attached to an index such as the Prime Rate or LIBOR (London Inter Bank Offered Rate) and changes according to changes in the index.   The credit card terms and conditions will say something like “Prime + 4%.” Given that the Prime Rate is currently 6.5%, then the interest rate on your variable rate card is 10.5%.

And although not currently common, it is still good to be aware that credit card issuers can apply a floor, or minimum, to the rate.   For example, if the terms are Prime + 4% with a floor of 10% and Prime drops to 5% you would get a 10% APR rather than the 9%.   According to Linda Sherry of Consumer Action, a nonprofit consumer advocacy organization, this was more common 3 years ago when interest rates really dropped, but became a less frequent practice as consumers started pressuring issuers to ban floors.

orangecardEven with low rate cards advertised as having fixed rates, keep in mind credit card issuers reserve the right to change the terms and conditions, including the APR, of the card for virtually any reason at any time.   If changes do affect your fixed APR card, your issuer is normally required to give you 15 days written notice; so it’s very important to open all your mail because if you happen to throw out the notice, then you will forfeit any right you may be given to opt-out of the rate increase.   And Sherry says once you make a purchase under the new rate terms, even if you didn’t read the notice, you have agreed to accept the new terms and conditions.

Credit card issuers can even change a fixed rate card to a variable card and vice versa with little notice.   Moreover, fixed rates are rarely fixed forever.

According to Scott Bilker, author of Talk Your Way Out of Credit Card Debt


cardbenefitsIn the credit card world forever is defined as the time it takes to pay something off!

The only real advantage of a fixed rate card is the rate usually doesn't increase as often as a variable rate card in a rising rate environment.   This benefit can actually work against you if rates are falling, though.

Curtis Arnold, founder of CardRatings.com, adds:

cardbenefitsIt is always a good idea to remember that when it comes to credit card rates, the card issuers 'hold all the cards'.   Being vigilant is the best way to keep your finance or interest charges to a bare minimum.

Please see our low rate card primer for more consumer tips regarding low interest rates.

We welcome your comments about credit card rates in our popular credit forum!


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