How to Compare Interest Rates on Consumer Credit Cards
Comparing credit cards can be complicated. It is hard to know what card offers the best deal and lowest interest rate. Understanding how interest rates are calculated can help determine what card is right for you.
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Interest Rate Factors
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Many factors go into calculating the interest rate on a credit card. The rates, methods of calculating interest and fees vary from company to company.
APR and the Prime Rate
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APR stands for annual percentage rate. This is the interest rate being charged on the card. Many credit card companies tie their APR to the prime rate. The prime rate is the interest rate used by banks to benchmark the interest rate on loans.
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Variable-Rate Cards
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A variable-rate card means that the APR is calculated using the prime rate or other index such as T-Bills. If the card advertises a rate of prime plus four percent, this means the APR will fluctuate with the prime rate. If the prime rate is currently five percent, the APR on the card in this example would be nine percent.
Fixed-Rate Cards
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A fixed-APR card means that the APR rate is fixed or will not move unless the card issuer decides to change it. This type of card gives you the security of always knowing what your interest rate will be. These are good cards to have if interest rates are rising.
Teaser-Rate Cards
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A teaser-rate card offers a low interest rate for balance transfers. These rates are only available for a certain period of time, and then convert to fixed or variable rates. These cards are excellent if you are trying to pay off the balance on another card.
How Interest Rate Is Applied
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It is also important to understand how the card issuer decides the balance the interest rate will be applied to. The majority of cards use an average-daily-balance method, which means they add each month's daily balance and then divide that number by the number of days in the month.
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