Credit rates and fees
All credit rates are identified using an Annual Percentage Rate (APR). There are two basic types:
Fixed APR: As the name suggests, a fixed APR means that the finance charge does not vary since it is not linked to the performance of an economic indicator. However, do not assume that this fixed interest rate will last forever. Card issuers always reserve the right to raise (or lower) a fixed APR as specified in the terms and conditions section of credit card agreements. Federal law requires that a credit card issuer give you written notice 15 days before increasing a fixed APR. Also, if you are late with a payment or exceed your credit limit, the card issuer may have provisions in the agreement to raise your rate, up to and including the maximum rate. Further details can be found below in the Fees section.
A fixed APR is advantageous when the prime lending rate is increased. When the prime rate goes up, credit card holders with a variable APR usually will see their interest rates rise also, while card holders with fixed APRs will not, so long as the card issuer does not exercise its option to increase the fixed rate.
Variable APR: With a variable APR, the interest rate being charged on your account balance changes as the economic indicator, or indices, used to determine the variable rate changes. Because the rate change is linked to the performance of the index (such as the prime rate), which may rise or fall, these plans are commonly called "variable rate" plans. Rate changes raise or lower the amount of the finance charge you pay on your account. If the credit card you are considering has a variable rate feature, the card issuer must tell you that the rate may vary and how the rate is determined, including which index is used and what additional amount (the "margin") is added to the index to determine your new rate. The most commonly used index is the prime lending rate or prime rate.
What rate will you qualify for?
When you visit a credit card web site, or receive an offer in the mail, they feature the interest rate offered to those with excellent credit. To qualify, one typically has to have a credit score of at least 660, but some credit card companies might require a credit score of at least 700 to qualify for the lowest rate card. If your credit score is below 660 you might be approved for the card, but at a much higher interest rate.
Lots of offers include teaser rates, basically low introductory rates that last for a few months. After the introductory period, the rates increase significantly. To determine the actual rate, you have to read the card offer carefully. Look for a box entitled "Credit Card Information". It will identify the rate, if it is fixed, or it will identify the Margin and the source for the Prime Rate if the rate is a variable rate. If it is a variable rate, the offer should also identify what the rate would be if calculated today. For example, if the margin is 15.99% and the Prime Rate is 9%, the variable rate would be 24.99%. Would you borrow money at this rate?
Balance transfer rates
If you do carry a balance on your credit card(s) every month, and especially if you are paying high interest rates, one thing you should consider is using a balance transfer. Basically, a bank will offer you a lower interest rate if you will transfer your credit balance from another credit card to their credit card. This offer may be an enticement to sign up for a new credit card, or it may be an offer from one of your existing card issuers and even come with your monthly bill.
Balance transfers may include an introductory rate or be a fixed rate. The introductory rate, as low as 0%, will apply for a specified period of time, usually six months or a year, after which the rate will increase to your current rate for credit card purchases (which could be fixed or variable). The fixed rate, usually higher than an introductory rate, will last until you pay off the transferred balance, as long as you make your payments on time. We always recommend a fixed rate if it is offered.
Two special notes:
1) In either case, the introductory rate or a fixed rate, remember that missing a payment could impose a very high penalty rate (see below).
2) Recently, Discover Card began offering an apparent fixed rate of 0% for life. However, you will be required to make $25 or $50 in purchases every month in order to maintain this rate beyond the introductory period. Forgetting to make the required amount of purchases every month will terminate the special rate and the standard purchase rate will apply. We do not recommend taking advantage of this offer unless you are very careful to make those monthly purchases (we hope you are not buying items just to keep this low rate) and you have no other option for reducing your current interest rates.
How much will you qualify for?
More than the interest rate, most consumers are interested in what the credit line will be. Have you ever received an offer in the mail for $5000, mailed the application in, and then received your card with a credit line of $500? This amount is based not only on your income and credit score, but also on your debt to income ratio. This ratio is determined by adding up your monthly debt payments and dividing by your monthly income. If your ratio is too high, or your score is too low, then you will receive a smaller line of credit, and in some cases none at all.
How high can your rate go if you miss a payment?
All credit card agreements specify a Default APR which is the maximum interest rate they can charge you if you fail to make a payment on your account. Some of these agreements allow for this increase even if your payment is late, you exceed your credit line, or your payment is not honored by your bank. If they do raise your rate, it will likely be for an extended period of time, and could last until you pay off your balance which is going to be extremely difficult given the excessive interest rate. As of November 2006, with the Prime Rate at 8.25%, we have noted default APRs as high as 32.24%, and they are variable which means if the Prime Rate goes up, so does the default APR. Read the section on Penalty APRs in your credit card agreement and you also may note that they determine the penalty rate by adding a very large margin to the index. The current rates for various indices, including the Federal Prime Rate, can be found here.
What is the minimum monthly payment?
The minimum monthly payment is based on the account balance rather than the particular interest rate. It's typically two or three percent (2 - 3%) of the account balance, but we have seen penalty conditions requiring a minimum monthly payment of 5% of the balance. As an example, if the monthly account balance (amount owed including the interest charges for the month) is $5,000, your monthly payment will likely be $100 (2%) or $150 (3%), as long as there are no late fees, over-the-limit fees, etc. If there are, these fees will typically be added on to the minimum fee. Whatever the terms of your monthly payment, they will be detailed on your credit card statement. Check it carefully so that there are no surprises when you receive your monthly bill.
What about those fees?
The typical fees include an annual fee, transaction fees for cash advances or balance transfers, late payment fees, and charges for exceeding the credit limit.
The annual fee is a charge for having a credit account. Most credit cards today do not charge an annual fee, but this will depend on the type of card and also your credit rating. We have seen credit cards that charge as much as $98 per year just for the privilege of using their card. If you have good credit, your personal bank card should not charge an annual fee. If it does, try and find another card with a lower rate that doesn't charge the annual fee.
Transaction Fee for Cash Advances
Most bank credit cards allow you to borrow cash up to a specified amount, usually a percentage of your total credit line. In addition to charging you a much higher interest rate for cash advances, credit institutions also charge you a fee. This fee is typically 3% of the amount of cash that you are borrowing (with no maximum payment), and we have recently noted that some bank cards have started charging up to 5%.
Transaction Fee for Balance Transfers
If you do carry a balance on more than one credit card every month, and especially if you are paying high interest rates, one thing you should consider is using a balance transfer. Basically, one bank credit card will offer you a lower interest rate if you will transfer your credit balance from another credit card to their credit card. To transfer your debt to their card at the new lower rate, the credit institution usually charges a transfer fee of 3%, although we are beginning to see transfer fees up to 5%. What is most important, however, is whether this transfer fee has a maximum limit. Most credit institutions charge a fee of about $50, but we have seen $99 maximum fees. Most recently, Chase eliminated the maximum fee, which means a balance transfer of $10,000 or even $20,000 could now cost you $300 or even $600, respectively. This fee should be considered when you are deciding whether or not to transfer a balance, and how long it will take before you actually begin to save money.
If your payment arrives at the credit institution even one day after the due date, they will charge you a late fee. In some cases, this fee will be a fixed amount, such as $35, while in other cases, they will charge varying fixed fees based on the amount of your debt. These fees typically range from $15 to $39.
Over -the-Credit-Limit Fee
If you borrow more than what is allowed on your credit limit, including interest charges for that month, the credit institution can and will likely charge you a fee for exceeding your credit line. The standard fee for most cards is $35, but we have noted varying amounts based on how much you charge over the limit, with fees ranging from $15 to $39.