Credit cards are an indispensable financial tool for most of us. Many of us cannot even imagine how the world managed to get its shopping and other financial needs accomplished before there were credit cards.
Credit cards are no doubt a matter of great convenience, but it is the interest rates on credit cards that inconvenience us. There are different brands and types of credit cards that vary widely from 0% interest rates to extremely high rates.
How are interest rates on credit cards computed?
The usual system of charging interest on credit cards is pretty simple. The bank or the credit card company assigns a particular grace period to every credit card consumer. This grace period denotes the period of time that is available to the credit card user to pay the credit card bills for that month in total.
If the user fails to pay any or all of the credit card bill amount within the grace period, the company then applies interest rates on credit cards according to the terms and conditions that were mentioned in the credit application.
An interesting point to note about the interest rates on credit cards is that it could be either fixed or variable.
Fixed interest rates on credit cards
Fixed interest rates on credit cards remain the same and do not fluctuate often once the credit card has been issued. This type of interest rates on credit cards is most convenient for credit card users because there is no element of surprise involved. They know very well what to expect and how much interest rates the balance that they carry on their cards will attract.
Variable interest rates on credit cards
Variable means changing and this type of interest rates keep changing over time, generally in response to a market index. The reason for the changes being that variable interest rates on credit cards are actually based on another kind of interest known as the prime rate. Variable interest rates are in reality prime rate plus another amount specified in the terms.
What is prime rate?
Prime rate is the rate of interest that is charged by banks when they extend credit to their most credit worthy consumers. Prime rate can also be understood as the best deal on interest rates that a credit worthy individual can manage to get.
Understanding everything about interest rates on credit cards helps you choose a credit card that will be more suited to your needs and economically more viable.
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