Credit Card Interest Rates

A discussion of interest rates is so important, since this is the area that means money spent. Some basic rules of interest rates on credit-card debt include:

Learn The Interest Rate...
Ask what the card's APR is, and if the annual fee is included in the calculation. Beware, the annual fee is often excluded. In that case, the APR will tell you what the regular rate is after the introductory low-rate period ends. Ask how interest is calculated, and what events would automatically escalate the rate to the ceiling rate. You should also determine the interest rate on cash advances or charges that exceed your borrowing limit. Generally, these rates are at the much higher ceiling rate. Also, it is typical that no grace period be provided for either of these kinds of charges.

Before you sign up for a credit card, carefully review the solicitation and the application. By law, key terms must be disclosed; they are usually described in a separate box somewhere on the application form. . Look for a box similar to the one below for information about interest rates, fees, and other terms for the card you are considering.

The Federal Truth in Lending Act requires credit card issuers to display the costs of credit cards in an easy-to-read box format on most applications and solicitations. The Schumer Box that lists the costs of the card is named after Rep. Charles Schumer who led the legislation through Congress.

The Schumer Box gives most important information on the pricing of the credit card offer, which details the card's prevailing annual percentage rate (APR), the grace period before interest in charged, and other fees or penalties. You can usually find the Schumer box on the back of the credit card application.

When you apply online, look for a link titled "Terms & Conditions" or "Disclosures" to find the Schumer Box (here).

Annual percentage rate (APR) for purchases
The interest rate you will pay, on an annual basis, if you carry over balances on purchases from one billing cycle to the next. If the card has a temporary introductory rate, the rate that applies after the temporary rate expires is also stated.

The APR can be fixed or variable.

A fixed rate remains constant until the credit card issuer gives written notice of a change. By federal law, issuers must give consumers 15 days' notice before changing the interest rate on a credit card.

The variable APR is usually based on an index such as the prime rate plus a certain percentage, and the card issuer may adjust the APR on your account when the prime rate changes. Some of the common indexes are the prime rate; the one-, three- or six-month Treasury bill rate; or the Federal Reserve discount rate.

The periodic rate is the interest rate the credit card issuer applies to the outstanding balance to calculate the finance charge for each billing period. The monthly periodic rate is determined by dividing the yearly APR by 12. For example, the monthly periodic rate on an APR of 21.9% is 1.825% (.219/12 = .01825).

Cardholders with an outstanding balance on their credit cards can estimate the monthly finance charge by multiplying the periodic rate times the balance. For example, the estimated finance charge on an outstanding balance of $3,000 at 1.825% is $54.75 ($3,000 x .01825 = $54.75). If the consumer makes a payment of $54.75, the interest due is paid but no money is left to apply toward the principal this payment only covers the cost of monthly interest and the loan would never be paid off! If the consumer makes a payment of $60, then $5.25 is applied toward the principal. The result is that it will take the consumer over 11 years to pay off the $3,000 debt that would cost the consumer $8,082 ($3,000 + $5,082 interest).  More on Page 2