Do you know what an interest rate or an APR is? Of course, you do. But can you enumerate all types of APR? And tell what is the best rate for you? The lowest one, you say? Absolutely agree. But let’s get more precise about interest rates types. If you ask why I need it, I know that there are low interest credit cards with favorable rates, and those for bad credit with sky-high interest, and I am after low APR plastics, I will tell you the reason. There is much more to the interest rate than just low and high APR.
The Types of Interest Rate
I’ll remind you once again that the APR (annual percentage rate) is just the same thing as the interest rate. Some people think that the APR is one of the interest rate types. In fact, this is just another term for the interest rate. Now let’s move on to the types.
The Prime Rate
The prime rate is a kind of interest rate benchmark used by banks to set the rates for their loans. This is the rate at which banks lend money to their favored clients, as a rule. The latest reported rate is 5.25%. This is considered to be the average prime rate currently. This figure is something like a starting point for all US banks and credit card companies. If you see a credit card offer with an interest of Prime + 6%, for instance, it means that you will get a credit card at 11.25% rate.
A Fixed Rate (Fixed APR)
If your card comes with a fixed rate, it means that the rate remains unchangeable. Until your creditor decides to change it. Even if your credit card terms promise you a fixed APR for life, your credit card issuer is eligible to change your rate. But your interest will not change under the trend of overall interests rise. So, in a situation of increasing APRs on the credit card market, a plastic with a fixed rate is what you are to look for.
A Variable Rate
A variable rate is subjected to change together with the fluctuations of certain indexes it is tied to (the prime rate, LIBOR, T-Bills, and others). When does it make sense to apply for a credit card with a variable APR? When interest rates go down (like in the situation with the recent Fed Rate Cut). You can come across an offer with a “variable rate for life”, or the one with “prime rate for life”. This gives you a guarantee that your interest rate will not go above the prime rate.
A Teaser Rate
A teaser rate (also introductory rate, promotional rate, limited-time-only rate, etc.) is a special rate that a lender offers you for a limited period of time. This feature can be attached to any type of the card (with variable or fixed APR, to business, student, rewards, bad, good credit cards, etc.) As a rule, this rate is very favorable, it can be whether 0% on purchases, or balance transfers, or even both, or a very low one. It usually lasts no longer than 18 months on the most beneficial offers. After your promotional period is over, your card is attached an ongoing APR. So, keep in mind your teaser rate expiration date.
A Penalty Rate or Default Rate
You can trigger a penalty or a default rate by breaking some of the credit card terms. If you are late or miss your credit card monthly payments, carry a great balance on other credit cards, default on other credit cards, you get accrued an enormous interest rate. So, be careful with credit card rules and regulations.
And choose the right interest rate!
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April 17th, 2008 at 3:57 am
Fixed APR is usually higher than variable one, but you always know the exact amount of interest you need to pay at the end of each month.
April 17th, 2008 at 4:25 am
I have variable rates! They fluctuate according to the Prime rate. An now when Prime rate is going down I pay less too.