Posts Tagged ‘Credit Card Interest Rates’

Although acquiring a credit card is much easier than adhering to a budget, planning your credit card expenses is esential to help prevent dire consequences from credit card utilization. This may stem from the fact that a credit card is by no means a mobile automated teller machine. It is however a means to get you out of an emergency situation such as a car breakdown, or for travel convenience. The following budgeting tips will provide you with great insights on wise credit card usage.

Spend within your capability

With or without a credit card, one should always spend only what they can afford. In fact, you should spend like you dont have a credit card because at the end of the day, you will have to pay back what you charged. It is true that you should never use your credit card to settle your grocery bills or to quelch your shopping needs. With all the discounts and bargains clamoring for your attention, it can be annoying to know that you will be paying more for it because of credit card interest rates.

Have a good concept of the Credit Limit

Rather than viewing the credit limit as the amount of money you can use every month, think of it as a loan that you must repay within 30 days. Then, tabulate the amount of interest that you have to pay if you decide to settle your repayment over a period of six months. This way, the 7500 will look less tempting and when calls with offers of higher credit limit plans come in, you will have the good sense to put the phone down.

Do not let your credit accumulate

You need to be responsible to own a credit card but as luck would have it, there are emergencies that are unavoidable. In this case, you should settle your credit card bills as soon as possible. You have to be self-disciplined on this because credit accumulates and credit cards work on compound interests. The longer you delay your repayment, the more you have to pay.

Credit Card Interest Rates – Why It’s Important To Understand How They Work

Einstein put it best when he said, “Compounding interest is the greatest mathematical discovery of all time”. Now the question you need to ask is, “Do I want this force working for me or against me?” If you own a credit card and you carry-over balances from month to month then you’ve got that amazing force called compounding interest working against you.

In this article, I’ll attempt to explain how this “force” works against you month after month after month, in the form of interest upon interest. And perhaps, by helping you to gain a better understanding of how this “force” works and how important even a small change in the interest rate you are being charged effects you and families financial future. And hopefully, it will also inspire and motivate you to do whatever it takes to pay off your credit cards and initiate some type of savings plan so you can put this “force” to work for you.

Credit Card Interest Rates are Compounded
The interest you pay on your credit card balances are compounded, which means that you pay interest on the interest from the month before. A simple example would be that if you were being charged an interest rate of 2% per month, you would not be paying 24% per year. In reality, you would be paying 26.82%. A neat little trick that credit card companies use to pick up an additional point or two of interest is to calculate interest on a monthly rather than on a yearly basis. You pay more but you don’t know you’re paying more.

A Brain Teaser
Here’s a little brain teaser based upon what you’ve already learned. Would you rather have 1 million in cash or 10,000 in some form of savings account earning you a compounded interest rate of 20 percent per year?

Hmm, let’s see how that 10,000 would grow after 10 years – 61,917 or 20 years – 383,375 or 30 years – 2,373,763 or 50 years – 563,475,143.

After fifty years, you would have over 500 million. Of course, you would have to take inflation into account and if we used a figure of 5% per year, then that 500 million would have the buying power that 10,732,859 does today. Not a bad return on your investment of 10,000 but on a side note it also exposes another lesson in how the compounding rate of inflation destroys wealth but that’s the subject of another article.

Clearly, that question was a bit tricky because there’s so many variables to take into account that would influence what decision you would ultimately make – but you get my point, the power of compounding interest and by the way… it’s the primary way credit card companies make their money is a powerful “force”. It’s also the way pensions work and the reason the prices of things seem to rise massively as you get older. Be afraid… or at the least very wary of compounding interest.

Compounding Interest Can Really Add Up
Now, let’s look at a more real world example. Let’s say you have an average unpaid balance of 1,000 on a credit card with an APR of 15 percent.

First year interest would be 150. However, this amount is then carried-over and added onto the balance and interest is charged on that. As a result, year two interest would be another 172.50 for a total of 1322.50 and it continues to build year after year. Year three, four and five would look like this – 1,520, 1,749 and 2,011.

As you can clearly see, after just five years at 15%, you would owe double what you borrowed and after 10 years you would owe four times. I know it’s hard to believe but once again this simple “real world” example dramatically demonstrates the power of compounding interest.

If you let something like that carry on long enough, you end up paying on that same amount of debt for years and years and end up paying back many times what you originally borrowed and in some instances you still may not have completely satisfied the original debt. Unfortunately, most people simply don’t take the time to think through this out and they feel that the high and never ending payments are simply their fault for spending too much money to begin with.

The Three Percent Difference
You may feel that there’s not that much difference between a credit card that charges an APR of 15% versus one that charges an APR of 12% but then again after reading this article I’m sure you’ve realized that there is and so – that’s exactly what I’m going to show you. Remember the previous example that showed you would owe over 2,000 after only five years at 15% after borrowing an initial amount of 1,000.

That same example at 12% reveals the following: Year one – 1120, year two – 1254 and years three through five – 1404, 1573 and 1762 respectively. After the same five year period you would have saved nearly 250 or almost 25% in interest from a mere 3% difference in APR. Quite dramatic and hopefully it will help you convince you to make the necessary decisions to pay-off your credit cards and start saving so that you can put, “the greatest mathematical discovery of all time” to work for you… rather than against you.

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It is one of the joys of the UK credit industry that prices of credit, and in particular of credit cards, have continued to fall over the past number of years. Today you can get zero per cent on balance transfers, and even zero per cent on purchases, offers that were simply unimaginable just a couple of years ago. This is all the result of increasing competition in the market place from alternative lenders and banks from abroad, particularly US banks. However, there are still many charges out there and it takes some care and consideration to make sure that you dont end up paying far more than you should for your credit cards.

The main charge associated with credit cards continues to be interest charged on outstanding balances. This is traditionally how credit card providers have managed to rake in the massive profits that they have become associated with. It doesnt take much research to discover that the interest rates on credit cards are among the highest on the market. While mortgage rates and personal loan rates can easily be as low five or six per cent, credit cards rates are easily over twenty five per cent. This is due mainly to the convenience and flexibility of credit cards as a source of needed money. If you find that you are carrying over large credit card balances from one month to the next, you are probably paying far more than you need to for your credit. The best way to remedy such a situation is to consolidate this credit.

Debt consolidation loans, typically secured over your home, offer far lower rates of interest. You can then reduce your outgoings to a single monthly figure that allows you to pay off the debt at a reasonable rate.

Another way to avoid credit card interest rates is to take advantage of zero per cent balance transfers. These can be great opportunities and are offered by credit card providers who are ever more eager to increase their market share and add you as a customer. You will benefit from low or zero per cent rates on any balances that you transfer over to the new card from other credit cards. A word of advice however is to make sure you close the original account. This avoids the temptation of racking up further spending and improves your credit rating by reducing the over all amount of credit available to you.

Other charges such as subscription fees are by and large a thing of the past. Some credit cards still charge annual fees on the basis that they offer other rewards or are more exclusive cards but the general advice these days is that you can get just as good results on cards that do not charge these fees so if you are paying a fee, perhaps you will want to switch to a card that is free in this sense.

Late payment fees and other penalties are incurred if you fail to keep up with your repayment obligations and you should make every effort to avoid these as they are completely unnecessary.

Avoiding Credit Card Wipe-outs: How To Succeed With Rate Surfing

Rate surfing can be a good way of reducing debt but there is a risk. To avoid long term damage to your credit rating, it’s best to make sure you do it right.

Rate Surfing Research

First of all, start by researching the current credit card rate offerings to see which one is best for your circumstances. Many people opt for the 0% interest deals, as these allow them to apply the payments the make to clearing any outstanding debt. These deals usually last for a limited period (between three and 12 months), so canny rate surfers will need to be on the lookout for the next deal.

Keeping Track Of Credit Card Interest Rates

With rate surfing, it is essential to move to the next card before the reduced interest period runs out. If you don’t, you could find yourself with hefty payments to make. If you’re surfing with many credit cards, you’ll need to keep track of the different offer expiry dates so you don’t get caught short. Keeping track of these dates can be as simple as writing them down on a piece of paper.

The more technically savvy may prefer to use a spreadsheet for this purpose. Whichever system you use, its worth using a calendar to keep track of the dates when you need to apply for new cards and move money. If you have an electronic calendar, set up automatic reminders for these dates. That means you will always know when it’s time to make the next credit card balance transfer.

Finding cards to move to is relatively easy, as there are several websites that offer comparisons of credit card deals. The same sites will also show you whether the 0% credit cards offer other incentives, such as air miles, vouchers, cash back or charitable contributions.

Balance Transfer Fees

One factor to think about is the rate charged for the balance transfer. With rate surfing becoming more popular, many credit card companies are charging a one-off balance transfer fee of approximately 2% of the sum transferred. This can soon add up when you are transferring large sums or working with several credit cards. There are still a few cards that do not charge this fee, so it’s worth shopping around to find one.

Organise Your Rate Surfing

Organisation is the key to successful rate surfing. For example, it may be worth automating your credit card payments by setting up a standing order through your bank. That way you can be sure that your credit card bill will always be paid on time, and there won’t be any danger of damaging your credit rating.

Rate surfing works best for those who intend to clear a debt. Adding more money to a transferred balance will not help with this goal. In addition, credit card companies may charge a different interest rate on new spending. This could increase, rather than decrease, the debt. With a bit of organization, most people can manage to reduce their levels of debt through rate surfing.