Credit Cards: Fixed Rate vs. Variable APR

Understanding Fixed Rate vs. Variable APR

Interest rates on credit cards are usually a lot higher vs. other types of debt. If you read the cardholders agreement you’ll see a a few interest rates.

  • Introductory Interest Rate is the rate in the first 6-18 months.
    • Card companies like to offer a 0-percent as a “teaser rate” for attracting user signups.
  • Standard Card Rate is the advertised rate. It’s prominently mentioned on the ads and tv commercials.
  • APR Variable Rate is the fixed interest rate, plus expected fees (i.e. annual fee). Card APR is also subject to change which is why it’s a “variable” rate.

Credit Card APR Overview

APR = annual percentage rate

When you apply for a credit card you should know how long you’ll be able to take advantage of the introductory interest rate.

When the intro. rate ends, new purchases switch to the standard APR rate.

How to Calculate Monthly Credit Card Interest Rate

To calculate your card’s monthly rate simply divide the APR found on the cardholder’s agreement and divide by 12 (months).

Example: APR on a credit card is 24.99-percent, divided by 12 months and you’ll get 2.08-percent per month interest.

In many cases the APR is a range (ex: 15.99 – 24.99%) and is based on your credit score.

How to Calculate Your Outstanding Balance

Each credit card company used their own method to calculate your outstanding balance, which they then use to determine what your monthly payment should be. The most popular methods are below, with the ones with the lowest finance charges first and so forth.

Avg. daily balance excluding new purchases: This one can be confusing. This calculates your balance daily and then divides it by the number of days in your billing cycle. New purchases are not included but payments and credits are included.

Avg. daily balance including new purchases: This is pretty much the same as average daily balance except you all new purchases are also included.

Adjusted balance: An adjusted balance is the balance that you have at the beginning of your billing cycle with all your payments and credits made during the period.

Previous balance: This is the balance that you have at the beginning of your billing cycle. It does not include new purchases nor reduce any of your payments during the billing period.

Two-cycle avg. daily balance excluding new purchases: With this method the average daily balance of two consecutive billing cycles are calculated and then divided by the number of days in the two cycles and it does not include any new purchases. However, any purchases made during the first cycle can incur interest on the second cycle on the purchase for both cycles if the balance was not paid by the end of the first cycle.

Two-cycle average daily balance including new purchases: The same as above, with the exception, that all new purchases are included.

Balance Transfer Interest Rates

Perhaps you’re not currently using your credit card, but you want to minimize the finance charge on your existing balance. One way to do so is to transfer your balance periodically to a new card with a low introductory “teaser” rate of interest.

In some cases interest on the first 12-18 months may be 0%. However, once the intro balance transfer APR offer is over, a new APR will apply and start charging you a variable rate.

Here’s a few things to look out for with balance transfers.

  • A low introductory interest rate that applies only for a very short period of time.
  • A low interest rate on new purchases, but a higher interest rate on balance transfers.
  • Balance transfer fees, particularly with uncapped amounts are calculated as a percentage of the balance transferred.
  • Termination fees and retroactive interest charges levied if you decide to surf the next wave and close the account or transfer the balance to another card before a specified time period has elapsed.

When you transfer a balance from an existing card to a new one, it’s a good idea to close the account you’re leaving. By doing so, you won’t be tempted to use the card again (at a higher rate of interest once the introductory offer period has expired), and you’ll minimize the potential for fraudulent use or identity theft. What’s more, if you do not close those accounts and later try to transfer your balance again, a new card issuer might turn down your application, afraid you’ll incur too much debt by running up new balances on dormant, but open, credit card accounts.

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