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  • One Credit Card, Multiple Interest Rates

    The interest rate, or APR (annual percentage rate), is one of the most important credit card features because it impacts what you pay for carrying a credit card balance from one month to the next. But, credit cards have more than one APR that you should know about.

    Five Types of Credit Card APRs

    Purchases APR: The purchases APR will apply to most of your transactions. This is the APR that applies when you swipe your credit card or make online purchases.

    Balance Transfer APR: This interest rate applies to balances you transfer to your credit card. The rate is often the same as for purchases, but it’s not odd for balance transfers to have a different interest rate.

    Cash Advance APR: The cash advance APR is typically the highest APR on your credit card. It applies to cash withdrawals from an ATM or transactions made with convenience checks. If your credit card is used for overdraft protection, those overdraft transactions may be treated as a cash advance. Cash advance transactions different from other transactions because they never get a grace period during which you can avoid paying interest.

    Promotional APR: Credit card issuers often have promotional APRs for purchases, balance transfers, or both for at least the first six months of the card’s opening. Promotional rates are typically less than 5% and often as low as 0%. Note that you can forfeit your promotional rate if you’re late on your credit card payment.

    Penalty APR: The penalty APR is enacted whenever you default on your credit card terms. It’s the highest APR on a credit card, often topping 25%. Delinquencies of 60 days or more trigger the penalty APR on most all credit cards. The penalty rate might also be triggered if you go over your limit, have a payment returned, or default on another account with that bank.

    Balances With Different Interest Rate

    It’s possible to have multiple balances on your credit card that are all being charged different interest rates. For example, you might have $100 in purchases as 10.9%, a $500 balance transfer at 2.9%, and a $300 cash advance at 18.9%. Paying off an account like this can be tricky if you’re not paying the entire balance in full at once.

    By law, credit card issuers must apply any payment above the minimum to the balance with the highest interest rate.

    However, if you’re just paying the minimum, chances are you’re only reducing the balance with the lowest interest rate. The law doesn’t specify to which balance credit card issuers must apply the minimum payment, but issuers often apply the minimum payment toward the lowest rate balance. Meanwhile, no payment has been applied to the highest interest rate balance which is increasing quickly because of the higher finance charges.
    It’s best not to mix balances with different interest rates on the same credit card. So, if you already have a purchases balance on a credit card, don’t take out a cash advance on that same APR. Your card issuer may tempt you with a low-rate balance transfer offer, but taking it may cost in the long run if you already have a higher rate balance on that credit card.

    If you already have credit card balances with different APRs, send more than the minimum payment so you can reduce the highest rate balance quickly

    Fixed vs. Variable Interest Rates

    These days, most credit cards have variable interest rates, which are tied to an underlying index, like the Prime rate or LIBOR. A variable interest rate may move up or down as the index changes and the credit card issuer doesn’t have to give you an advance notice of the rate increase.

    Credit card issuers are allowed to change the APR on a fixed rate credit card. However, they’re required to give 45-day advance notice before for the rate becomes effective. In that time period, you can reject the rate increase by sending a letter to the address on the rate increase notice.

    Know Your Rates

    For your existing credit card, you can find the APRs on your monthly billing statement. Your statement will also show the balance and finance charge for each APR. The credit card disclosure that accompanies credit card offers will tell you the APRs you can expect with a new credit card.

    Source: FederalReserve.gov
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