How Credit Card Balances are Charged: Fixed vs Variable APR

Calculating fixed and variable interest rates of credit cardsBesides the requirement to pay back the actual amount that was borrowed on a credit card, there can be other charges associated with an account. If you’re planning to open up a new credit card account you’ll want to take the time to review these charges prior to submitting an application. By law, each credit card provider is obligated to clearly indicate any and all costs that are associated with the card before an individual is actually placed on that account. So, it’s pretty easy to review the specifics. Here are some things that you’ll want to look over for a better understanding of what comes with a credit card offering.

The Card’s Interest Rate

On both the initial credit card offer and application the card’s interest rate is listed as the APR, which stands for “annual percentage rate.” The APR can be either a “fixed” rate or a “variable” rate. The APR is generally tied to the prime rate, although it can also be tied to other financial indicators. The most important thing to understand is that with a fixed rate APR the interest rate will remain the same from month to month, whereas a variable APR is subject to monthly fluctuation.

However, it’s important to note that the interest rate on a fixed APR card can also change depending on certain “triggers.” Two key triggers are late payments and spending over the card’s pre-determined credit limit. The card issuer may also decide that the APR needs to be changed and may do so, but they have to provide you with notification and give you the chance to opt out. Opting out usually means you won’t be able to use you card anymore without agreeing to the new terms. Of course, all of this means very little if you’re diligent when it comes to paying off your monthly balance.

Credit Card Limit

As the name indicates, the credit limit is the total amount the issuer is willing to allow the cardholder to borrow at any given time. This amount is usually based on your credit history and score, and can vary by extraordinary amounts ranging from less than $500 all the way to hundreds of thousands of dollars. You don’t want to carry a monthly balance in which you’re consistently very close to your credit limit. That’s because it can have a negative effect on your credit score. Therefore, if you can’t pay off the entire credit balance then at least try to pay as much as possible in order to keep the balance low. It will also help reduce your fees, especially over the long-run.

One advantage that you may find with some credit card providers is a routine evaluation of your credit card spending habits and subsequent balance payments. This can possibly lead to an increase in your card’s line of credit, in order to more closely match your routine spending needs. However, it can also lead to a decrease in you credit limit too.

Posted on September 5, 2017 by in Credit Cards

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