Imagine how wonderful credit cards would be if they didn't
charge interest. You'd get the safest way to pay, plus perks,
extra consumer protections, and miles, points or cash back all
for free -- unless you opted to pay an annual fee for extra
services. For close to half of Americans, that's already a
reality, because they never carry forward balances to the
following month. The rest, probably a small majority, do
sometimes, often or always have credit card debt. And they pay a
Credit card rates today
According to the IndexCreditCards.com
, the average consumer non-rewards card was charging 15.48
percent APR in mid-August, while the same figure for a consumer
rewards card was 17.83 percent. That "APR" stands for "annual
percentage rate," and represents the actual yearly cost of
borrowing over the entire term of a loan. So short-term loans can
be less expensive than they sound. For example, if you borrow
$100 for three months, the actual interest you'd pay at 17.83
percent APR would be just $4.38, according to one of this site's
credit card calculators.
Still, that's not cheap compared to some other forms of
borrowing. And those APRs are averages: IndexCreditCards.com
writer Richard Barrington is an expert on rates, and
that, in August 2014, someone with a great credit score
could find an APR 4.1 percentage points lower than someone with
an average one.
How rates are set
Just about every card's rate is based on a prime rate, often the
one published daily in The Wall Street Journal. This reflects the
rate banks charge their most secure and creditworthy customers --
usually huge, global corporations -- for borrowing, and has been
stuck at 3.25 percent for ages now. If you have variable-rate
plastic (and vanishingly few products nowadays have fixed rates),
then your issuer should have identified in your card agreement
both the prime rate it uses and the "spread" you have to pay,
which is the amount in percentage points on top of that prime
rate you're going be charged.
So, if your card currently charges a 17.25 percent APR, and
your issuer uses the Journal's prime rate of 3.25 percent, your
spread is 14 percent. And, when the prime rate goes up, your rate
should too, and by the same amount.
This can happen automatically, and without notice. However,
according to the
- The new rate can only apply to new purchases. Your existing
balance should continue to attract the rate that was in force
when you charged the purchases, cash advances or whatever that
created the debt.
- That means, if rates start changing frequently, you could
have numerous APRs being applied to a single card.
- However, your issuer must apply each of your monthly
payments to the portion of your balance attracting the highest
APR at that time.
- Your issuer can change your spread whenever it wants. But
it must provide you with at least 45 days' prior notice, and
give you the option of cancelling your card. If you do that,
credit card companies must allow you time to repay the debt.
That can be up to five years, but they are entitled to increase
your existing minimum payment by up to 100 percent.
- You don't get the 45 days notice of rate changes if you're
reaching the end of an introductory offer and are just
reverting to the published go-to rate, if you've previously
agreed a repayment plan with your issuer and have failed to
honor your commitments, or if you legitimately incur a penalty
It's important to remember that most plastic charges a
different interest rate for cash advances and sometimes balance
transfers from the standard one applied to purchases. Cash
advances in particular can be seriously expensive.
When will rates go up?
Just about every expert agrees that the question posed in that
subheading is correct: You have to ask when -- not if -- rates
are going to rise. At the time of writing, the
Federal Funds Rate
is close to zero (0.09 percent), so there's really only one
way for it to go. And the debate within the Fed committee that
determines rates is raging. Hawkish members want a rise right
away, while even most dovish ones expect some upward movement
during or before mid-2015.
And, when Fed rates rise, it's pretty much inevitable that
prime rates and credit card rates are going to, too. This is
unlikely to bother most cardholders all that much: close to half
pay down balances in full every month, and many of the rest
probably carry small balances for short periods, just to smooth
out their cash flows.
But a significant group uses credit cards differently. Its
members rely on their plastic to get through to payday. And they
have no choice but to keep charging purchases, pretty much
regardless of the prevailing rate. If you're in that
- Remember that the Fed is going to be doing its best to make
sure any rate rises are slow and gentle, though nobody can make
- You almost certainly still have months -- maybe a year or
so -- to try to reduce your dependency on your cards. That's
easier said than done, but, if you're using them for occasional
treats, now might be a good time to start resisting
- Whatever you do, try to avoid cash advances. They can be
ruinously expensive. It's much cheaper to pay for your morning
coffee and other small items as purchases on your card.
- Higher rates are almost certain to mean it takes you longer
to pay down your card debt. Use this site's
credit card calculators
to model different rate scenarios and see how this might
- If your credit's still good, consider moving your card debt
into a different form of borrowing with a lower rate, such as a
personal loan from your bank. If you're a homeowner, a home
equity loan or home equity line of credit (HELOC) could slash
your interest costs and monthly payments, though these products
require you to put your home on the line if you fail to keep up
That last bullet point goes for everyone. Credit cards are by
far the best way to pay for purchases, but, for most, they're
lousy ways to borrow. If you've a good credit score, you probably
have cheaper options.
originally appeared on indexcreditcards.com.
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You may also enjoy these insurance-related articles:
What You Need to Know About Credit Card Rates
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