Understanding Credit Card Interest Rates
It is no secret that credit cards are in just about ever of age consumers wallet in America. However, it is also no secret that most people who have a credit card and carry debt on their card don’t even know how the interest rates work. It has been thought by many consumers that the lenders create terms and conditions hard to understand so that consumers continue in their happy oblivion. This isn’t the case though. The reality is that there are so many legal regulations in the credit card industry that without all the legal mumbo jumbo in the contract, the creditors would be breaking the law. With that said, terms and conditions aren’t going to change, it is now up to us as consumers to educate ourselves regarding credit cards and their interest rates. So, here is a list of the different types of interest that you will find associated with credit cards:
Standard Interest Rates
The first type of interest rate that you will come across is called the standard interest rate. Also known as the purchase interest rate, the standard interest rate is the rate of interest that will be applied to balances accumulated through standard purchases such as groceries or gas. The standard interest rate is generally the interest rate that will be charged to the majority of a balance on a credit card.
Introductory Interest Rates
Introductory interest rates are the result of incredible competition in the credit card industry. These are short term interest rates are often called promotional interest rates because credit card lenders use them as promotions to attract consumers. Generally introductory interest rates cal be as low as zero percent and will last anywhere from 6 to 12 months. However, in some cases, you will be able to find introductory interest rates that last as long as 15 to 18 months.
Cash Advance Interest Rates
Cash advance interest rates are pretty much self explanatory. These are the interest rates that will be charged to balances accumulated through cash transactions. Generally, the cash advance interest rate will be the highest not-default interest rate on the account. Cash transactions include ATM withdraws, wire money transfers and even cash back in a grocery store. Because cash advance rates are so high, it is in your best interest to stay away from credit card cash advances.
Default Interest Rates
The default interest rate is the last type of interest that will be featured on most credit card accounts. The default interest rate is one however that you don’t ever want to be charged. This is the interest rate that consumers will need to pay on all of their balances should they default in any way. Some examples of credit card defaults would be making late payments and spending more than your credit limit allows.
How Payments Are Absorbed
OK, this is where this gets pretty interesting. Most consumers are under the misconception that their payments go to pay off the highest interest rate first. Unfortunately, this is not the case. In all reality if minimum payments are made, they will be allocated to the lowest interest rates. This will cause the higher interest rate balances to grow and keep you in debt for longer. However, if you send more than your minimum payment, the extra payment will be allocated to the higher interest rate balance. Therefore, if you are paying debt on multiple interest rates for one credit card, I would suggest sending more than the minimum payment each month!
Want Lower Interest Rates On Your Credit Cards?
Read: 3 Ways To Reduce Credit Card Interest Without Third Parties
Or
Compare Balance Transfer Credit Card Offers
Or