A credit card is a form of loan, albeit one involving more flexible terms and smaller sums of money than a personal loan or a mortgage. However, like other types of loans, credit cards also have interest rates. You need to understand more about how interest rates work, and how they will affect you and your finances, before taking out a credit card.
Why interest rates can be confusing
At the moment, credit card issuers can choose one of 14 different methods for charging interest. These methods involve calculating interest in different ways. So, if you have two credit cards which seem to have the same interest rates and you use them in exactly the same way, one could cost you more because the provider has decided to use a different method to work out that interest.
APR
Another reason why interest rates are confusing is because the industry uses acronyms such as APR to talk about interest. APR (Annual Percentage Rate) is a standard way to work out the cost of credit, taking into account the interest rate and any other charges. This rate shows you how much it will cost to borrow money over the course of a year.
It should be the case that credit cards with lower APRs give you the best deal, but it doesn’t always work out that way. This is because many cards start and stop charging interest on transactions at different times. However, most lenders offer a ‘typical APR’ when advertising credit cards. This is because when you apply for a credit card, you may be offered a rate based on your credit history and personal circumstances. According to a Guardian factsheet, banks only have to offer their advertised APR or a better rate to 66% of potential customers.
When interest rates will affect you
If you pay your balance off in full every month, you probably won’t need to worry about interest rates. However, interest rates will affect you if:
You only make minimum payments off your total balance every month
You pay anything less than the full balance each month
You use your credit card to take money out of a cash machine
If you meet any of these criteria, you should be looking to find the lowest interest rates when carrying out a credit card comparison. If you do your research and take the time to work out how much a credit card will cost you in the long term, you are likely to end up with a good deal and a way of borrowing money that suits you.
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