Sorting Out Credit Card Interest Rates

Every credit card has to clearly list its interest rates, fees, and other card member terms – either on the back of a printed card solicitation or on a webpage linked from the bottom of a credit card application page. (Hint: Check the fine print at the bottom). Knowing how to read these credit card terms is critical to finding a credit card that will not rip you off.

When reading credit card terms, you will encounter several different types of interest rates. Here is what they all mean:

The annual percentage rate (APR) is the annual interest rate you are charged on purchases on your credit card. For all intensive purposes, the APR is your interest rate.

The prime rate is the interest rate used by banks to set the bar for all interest rates for loans. The prime rate fluctuates over time – historically between 6% and 10%. The rate is based upon monetary policies set by the Federal Reserve, and listed everyday in The Wall Street Journal. Many credit card interest rates vary according to the prime interest rate. For example, a credit card interest rate may be listed as “Prime + 5%”. If the prime rate were 6.25%, that credit cards’ interest rate would be 11.25%.

A fixed interest rate or fixed APR means an interest rate that does not fluctuate unless the card issues decides to alter the rate and notifies the cardholder, in writing, about the change. Some credit cards will advertise their rates as “fixed for life”. Sounds tempting, but credit cards can – and will – legally change your rates anytime they wish. It makes sense to find a low fixed interest rate card when the prime interest rate is on its way up.

A variable APR is an interest rate that changes on a regular basis based upon a benchmark interest rate such as the prime rate. Variable interest rate cards can often be better deals when interest rates are low, but can quickly loose their appeal when interest rates are on the rise.

Borrowers with preexisting credit card balances will likely want to find a credit card that offers a teaser APR, or promotional rate. Many cards offer temporary interest rates that apply to either balance transfers or purchase (sometimes both). These rates can be as low as 0%. While these introductory rates can save you a lot of money on interest charges and help you pay off a credit card debt faster, you need to be very careful about special terms attached to such rates.

For example, if you transfer a balance to a credit card with a 0% interest rate on only balance transfers, and then make a purchase with the card. The card’s regular APR – let’s say it’s 14% — will be applied to that purchase. Then, as you make payments to your credit card, those payments will be applied to the balance transfer, at 0% interest – before they are applied to the purchase at 14% interest – meaning you will be paying finance charges on that purchase until your transferred balance is completely paid off.

Additionally, credit card companies will take away a teaser rate immediately if you break any of the terms in the card member agreement. For example, if you are late with a payment, if you go over the credit limit, or if you bounce a check to the credit card company. Some credit cards will even raise your interest rates if your overall credit score declines for any reason. This could include carrying too high a balance on another credit card, making regular late payments, or defaulting on a loan.

How Credit Cards Apply Interest Rates

Believe it or not, the percentage interest you are charged annually isn’t the only factor that determines how much you will pay to a credit card to carry a particular balance. Credit cards calculate your balance (to which the interest is applied) in different ways. Most credit cards use the average daily balance method, which is computed by adding the balance you are carrying every day in a particular month and dividing that total by the number of days in the month.

With the average daily balance method, for example, if you are carrying a $1,000 balance for the first 15 days of a 30 day month, pay it off in full, and do not carry a balance for the next 15 days, you will be charged interest on a balance of $500 that month.

Some credit cards may use what they call a “two-cycle average daily balance method” which means that they average two months of balances instead of one, often resulting in a higher finance charge because you will continue paying interest on purchases for up to two months after you have paid them off.

The good news is, however, most credit cards provide a grace period to pay off new purchases. Grace periods range from 20 to 28 days. Two important things to realize about grace periods, however: your credit card bill’s due date may be later than the end of the grace period. And, if you do not pay off your credit card bill in full each month, interest will be applied on new purchases from the day they post.

The Discover More Card and Discover Motiva Card are both excellent credit cards offering competitive interest rates, generous balance transfer offers, and cash rewards. How do you know which one is right for you? In a nutshell, the Discover Motiva Card is best for those who want to transfer a balance that will take more than one year to pay off.

The Discover More Card is better for those who want to transfer a balance that will be paid off in less than a year, want to enjoy a 0% introductory interest rate on purchases, or who just want a low APR credit card with excellent cash rewards.

Balance Transfer Offers

The Discover Motiva Card offers a balance transfer rate of 3.99% for 12 months. The Discover More Card offers a balance transfer rate of 0% for 12 months.

Motiva Pay-on-Time Bonus

The Discover Motiva Card also offers up to two months of free interest per year when at least the minimum payment is made on time for six consecutive months. The Discover More Card does not offer this benefit.

The Discover More Card’s 0% introductory APR for 12 months includes purchases and balances transfers; the Discover Motiva Card does not offer an introductory APR on purchases.

Discover Card Cash Rewards

Both Discover cards come with no annual fee and offer 1% cash back on all purchases, the ability to earn up to 20% cash back by shopping with online partners, and the ability to increase or even double cash rewards by redeeming the rewards for gift certificates from 80 leading stores and restaurants.

The Discover More Card offers an instant $40 cash back bonus credited to your account after your first purchase, the Motiva Card does not offer this bonus.

Credit Requirements, Acceptance Rates, and Limits

Both Discover credit cards require at least average credit to be approved; applicants with significant negative marks on their credit scores may not be approved for a Discover Card.

Otherwise, acceptance rates for the Discover More and Motiva Cards are similar.

Both Discover cards offer generous credit limits that could be as high as $10,000 or more.

If you are interested in either card, you can read reviews and apply online for either the Discover Motiva Card or Discover More Card now.

Simple Itemization – Good business credit cards offer quarterly and year-end statements, not just monthly statements. That can save a lot of time and hassle preparing year-end expense summaries for bookkeeping and tax purposes.

Build Business Credit – A business credit card gives your new small business the opportunity to build business credit. As your business grows you will be able to rely more on this business credit for loans or financing and you can avoid using your personal credit history to secure capital.

Tailored Rewards – For consumers, credit card rewards programs are nice, but they are not likely to add up to substantial savings. Not so with business credit cards. With rewards programs that are suited to small businesses you will earn cash back on everything from office supplies to phone services to travel. Depending on how much you charge each year, these rewards can provide a nice boost to your bottom line.

Manage Employee Spending – A final perk to business credit cards is the ability to control employee card use. Not only can you request an unlimited number of employee cards on the same account, you can set individual credit limnits for each employee, and monitor employee spending with individual employee credit card statements.

If you think a business credit card is right for you and your small business, take a moment to compare and apply for a business credit cards now.

Have more questions? Read the business credit card application FAQ.

What is the difference between business credit cards and consumer credit cards?

Business credit cards offer unique features that benefit small business owners that personal credit cards do not. These include: quarterly and annual itemized statements, rewards on things businesses use most like office supplies and travel, and the ability to issue employee cards with specified spending limits.

Do I need to have a business tax ID to apply for a business credit card?

No. You can apply for a business credit card using your own social security number as your tax ID.

Do business credit cards impact my personal credit score?

Yes. Unless you have established business credit, your business credit card will be tied to your personal credit history, and the failure to manage your business credit card account responsibly could negatively impact your personal credit score.

I am just a freelancer or sole proprietor. Can I get a business credit card?

Yes. Anybody can apply for a business credit card, even if you do business in your own name.

I have bad credit. Will I be approved for a business credit card?

Business credit cards typically require a good to excellent personal credit history. It is unlikely that you will be approved for a business credit card if you apply using your social security number and you have a poor personal credit history.

An employee of mine has bad credit or no credit. Can I get an business credit card issued for that employee?

Yes. Employee credit cards are issued under your account and will not need to be approved for the credit card individually. If they fail to use the credit card responsibly, however, it can affect both their credit history and yours. If you know you have an employee with credit problems, use the employee spending limit and individual statement features most business credit cards offer to carefully monitor their spending.

The American Express Blue Cash credit card will receive only minor tweaks and will remain a semi-transparent credit card with the blue seal in the center.

See the new American Express Blue Cash credit card design.

See the new Delta SkyMiles Credit Card design here.

The only reason you should get a credit card is to begin building your credit history. Only after you get used to making a few purchases with the card each month and paying them off immediately should you think about using the credit card regularly as a financial tool to make your monthly spending easier.

So, assuming you are prepared to get a credit card, what are your options?

Most major credit cards (American Express, Citi, etc) will not approve you without at least some good credit history, unless you are a full-time student.

If you are enrolled as a full-time student and over 18, you can apply for a student credit card and, as long as you do not have bad credit, will usually be accepted.

Student credit cards have small credit lines and higher interest rates, but these can be improved after some time of using the card responsibly.

Not a student? Your best bet is to walk into your local bank, whether it’s a small town savings bank, credit union, or even a branch of a large bank like Wells Fargo or Bank of America.

If you already have a checking account with them, ask them if they offer a credit card. Banks that have a relationship with you are more likely to issue you a credit card, even if you don’t have a credit history.

If you don’t have a checking account already, get one now, and then get a secured credit card.

What are secured cards? Basically they work like a pre-paid debit card, in which you deposit money and then draw on it with the card.

However, all pre-paid credit cards are not secured credit cards. The difference is secured credit cards you must recharge your account by the amount you charge each month. When you successfully do that, the card reports your activity to the credit bureaus so you successfully build your credit history.

If you want to start with a secured credit card, try the ONYX Card or NMB Secured Card.

Credit card interest rates typically range between four and ten points higher than the prime interest rate. If your variable credit card interest rate is prime plus six, for example, your interest rate will drop from 13.75% to 13.5%.

Credit cards with fixed interest rates will not be affected by prime rate adjustments. You can determine which kind of rate you have by referencing the terms and conditions that are mailed with your credit card.

Citi credit card customers will notice easier access to the sites’ most popular features such as online bill paying, recent credit card activity, credit card fraud alerts, and personal information updates.

In addition, Citi credit card customers will be able to request .pdf credit card statements from up to the past 15 years.

What does it take to get a Centurion Card, the only credit card made from titanium, not plastic?

The Centurion Card is issued by invitation only. To start, you will need to carry an American Express Platinum Card and be an American Express Cardmember for at least a year.

If you spend at least $250,000 a year on your Platinum Card, you may be considered for a Centurion Card. But being a big spender alone won’t get you the black card.

You’ll also need to pony up a $5,000 initiation fee and $2,500 annually for the privilege of carrying the card.

What does it get you?

Besides the ability to charge that private jet you’ve been wanting, you’ll also get automatic Elite status at a range of Airlines and Hotels, free companion tickets and first class upgrades, free stays at the worlds most exclusive hotels, personal shopping services at designer stores, and more.

If you’re not quite ready for the Centurion Card, but want to start working towards it, the American Express Gold Card is the place to start.

The Fine Print

In fact, most no pre-set spending limit credit cards come with a credit limit. The card then gives the card holder the ability to exceed that credit limit in some instances if the amount of the balance over the credit limit is paid in full before the due date.

That means that credit cards with no pre-set spending limits will authorize each purchase on a case by case basis. Whether or not they authorize a particular transaction will depend on multiple factors including your account history, your current balance, your credit history, you income, and your financial assets.

Avoiding Your Limit

If you plan to make a big purchase on your no pre-set spending limit credit card, you may be in for a surprise, as the transaction can be declined.

To avoid an embarrassing situation, it’s best to call your credit card company prior to making any unusually large purchases or any purchases that will put you over your credit limit.

You can also negotiate a higher spending limit after using the credit card for a year or more. Your chances of getting a credit limit increase will be best if you charge a significant amount on your card each month and pay the balance in full. You’ll also need a clean credit history.

Compare and apply for no pre-set spending limit credit cards now.