Understanding How Your Credit Card Interest Rate is Set

Understanding How Your Credit Card Interest Rate is Set

When applying for a credit card, it is important to understand how the interest rate, which is usually charged each month on your unpaid balance, is determined. This can help you to save money by choosing the credit card with the lowest interest rate as well as avoiding surprises when you get your monthly statement.

Many cards are issued with an interest rate that is set as LIBOR or the Prime Rate, plus an additional specified charge.  This means that the interest rate you pay on unpaid balances is equal to the LIBOR or Prime Rate, plus an additional charge, which is set forth in the credit card agreement.

LIBOR and Prime Rate

The first part of the charge, LIBOR or Prime Rate, stands for two different ways interest rates are set by banks and other financial institutions.

LIBOR is an acronym for London Interbank Offered Rate. It is the rate at which banks borrow money for one day, one month, two months, six months, one year, etc., and they pay interest to their lenders based on certain rates. The LIBOR is an average of these rates and varies each day.

Many financial institutions, mortgage lenders and credit card agencies track the rate, which is produced daily at 11 a.m. They then use this rate to fix their own interest rates. These are usually higher than the LIBOR rate and reflect the banks assessment of the risk and credit worthiness of the borrower.

Credit worthy or borrowers seen to be at minimal risk of defaulting, or not repaying their loans, are charged less than borrowers who are assessed as riskier or less credit worthy. These borrowers pay a higher interest rate to compensate the institution for the possibility of not getting its money back.

Prime Rate: as the name clearly states, the Prime Rate is the interest rate that commercial banks charge only their most credit-worthy customers. The prime interest rate, or prime-lending rate, is largely determined by the federal funds rate, which is the overnight rate at which banks lend to one another. It is also important for retail customers, as the prime rate directly affects the lending rates for mortgage, small businesses and personal loans or some credit cards.

Only the banks’ best customers are seen as having only a small risk of defaulting, so only they are charged the “Prime” or best rate. Those not having the best credit worthiness are charged an amount above Prime, to be determined by the banks’ assessment of their default risk.

How LIBOR and the Prime Rate affect your credit card interest rate

If your credit card interest rate is set as some amount above either LIBOR or the Prime Rate these rates will be used as the base for your interest rate charge. Then an additional amount is added on, such as LIBOR or Prime plus, for example, 5%. This means that your total rate will be whatever the LIBOR or Prime rate is, plus an additional 5%. The lower the additional rate is, which is usually determined by your credit worthiness, the lower your interest rate will be compared to a rate that is higher above LIBOR or the Prime Rate.

It’s also important to remember that LIBOR and the Prime Rate are both floating rates, meaning that they can change daily. If your rate is set as a percent above the LIBOR or Prime Rate when the credit card is issued, the rate will usually not vary. However, If your credit card interest rate is set as a percent above a daily LIBOR or Prime rate, the additional amount above LIBOR or Prime will be set, but the base rate itself might go up or down, causing your interest rate to fluctuate. This can lead to surprises in your credit card bill if these rates go up dramatically.

Also, be aware if the credit card agreement says that the amount of the interest rate above LIBOR or the Prime Rate can be changed, based on certain events.  This means that your interest rate might be raised an additional amount above LIBOR or the Prime Rate, which can also go up or down.

Read your credit card agreement

It’s always important to read through your entire credit card agreement, even the fine print. When you understand how interest rates are set and when interest charges are added to your credit card account, you’ll be ale to pick the credit card with the best interest rate for you.

To find the credit card that’s most suited to you, go to www.bestcashcow.com and check its offerings.

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Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

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Pain at the Pump?  Reward Credit Cards May Help Ease the Financial Anguish

Pain at the Pump? Reward Credit Cards May Help Ease the Financial Anguish

Gas prices are on the rise again, but gas reward cards can help you save some money - if you know what to look for and match the card to your spending habits and credit needs.

Americans enjoyed slightly lowered gas prices in May and June, but that trend didn’t seem to last for long as many news outlets are reporting higher prices within the last few days. Additionally, if the Wall Street Journal is correct, prices could climb even higher if an agreement isn’t reached in Norway to prevent a costly shutdown of Western Europe’s largest oil exporter.  When gas prices rise, credit cards that give gas rewards (and cash back on gas purchases) can seem all the more enticing. But is a credit card with gas rewards a good idea?

Gas station credit cards, like this Chevron and Texaco Credit Card, often carry annual fees and high interest rates (a $25 annual fee, in this case, and a 26.99% APR) for limited gas rewards. Additionally, with a gas station-specific credit card, you are often limited to using that gas station only. A gas station credit card may be a good option for people with poor (or no) credit history and are seeking to build up good credit, even if it costs them to do so.

A smarter option for people with good credit is the Chevron and Texaco Visa Card, which can be used just like a regular Visa card, anywhere Visa is accepted. The card boasts no annual fee and gives 20 cents per gallon in fuel credits for every $1,000 spent per month on the Visa, or 10 cents per gallon in fuel credits if you have $300 - $999 of monthly spend on the card. While this card has no annual fee, it still has a hefty APR (26.99% - just like the regular gas credit card). Additionally, you would still be limited to redeeming your fuel rewards only at Chevron or Texaco stations, which may not have the best gas price in your neighborhood. You might be able to get a 10 cent per gallon reduction just by shopping around.  

There are better options out there for those seeking gas rewards, like this BankAmericard Cash Rewards Visa Signature Card.  This card offers 1% cash back on every-day purchases, 2% back on groceries, and 3% back on gas. If you already have a Bank of America checking or savings account (or if you open one), you can earn an additional 10% bonus on your cash back rewards if your rewards are deposited into your BofA account. They also have nice introductory incentive as well: you can get a $100 cash back bonus if you make at least $500 in purchases within the first 90 days of the account opening, and you get a 0% intro APR on purchases for the first 12 months. After your introductory rate period, you will have a variable APR that’s between 12.99% and 20.99%, but even the highest rate—20.99%—still beats the credit cards offered by gas stations. This also has card has no annual fee, which is extra gas money in your pocket.

If you break down the rewards just on gas purchases, you’d earn $4 on a $40 fill-up with the Chevron and Texaco Visa Card and you’d earn $1.20 with the BankAmericard. The BankAmericard gives you freedom to shop around, and if you need to gas up in a pinch (where there are no Chevron or Texaco stations around), you’d still earn cash back rewards.

As with any banking product, there is no one-size fits all solution. If you already have good credit, a card like the BankAmericard Cash Rewards Visa Signature seems like a no-brainer. However, if you pay off your card balance in full every month and routinely fill up only at Chevron or Texaco stations, you may get more bang for your buck with the gas station Visa card.  For those seeking to build their credit history, you may have to go with a regular gas station-specific credit card and pay the annual fee until your credit score qualifies you for better cards. No matter which option you choose, you should always consider your current spending (and payment habits) to find the best deal.  

Find the best credit card for you here.

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Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

Advertising Disclosure: This site may be compensated for hosting offers.


Five Best Credit Cards for Travel Rewards

Five Best Credit Cards for Travel Rewards

Those aiming to accumulate air miles and hotel points quickly should consider these credit cards.

Many people aim to accumulate credit card rewards by traveling on specific airlines and being loyal to certain hotel chains.  However, the best way to rack up air miles and hotel points is actually by opening specific branded cards.  Here are the five cards to consider:

Chase Sapphire Preferred.  This card gives 40,000 Ultimate Rewards points upon signup that can be transferred on a 1:1 basis to either United or British Airways (or certain other airlines or hotels), does not have an annual fee in the first year, and has no foreign exchange fees.   In addition, you receive a 7% points dividend at the end of the year and receive 2x points per dollar spent on dining and travel. Chase also offers a United Airlines card that offers 40,000 United miles without an annual fee in the first year and gives certain advantages over the Sapphire card when used on United, but has foreign exchange fees.

Citi ThankYou Premier.  This card gives 50,000 bonus points after spending $2,500 within 3 months.  Unlike the Sapphire Card, these points cannot be transferred to hotels or airlines, but they can be used to book airfare at 1.33 cents a point, or $665 in airfare.  One advantage is that you will get miles and credit towards elite status for tickets booked with Citi ThankYou points.   Those who have a particular allegiance towards American Airlines may find a Citibank American Airlines card to be attractive: it offers 40,000 American AAdvantage points for signing up and often has a lower spend requirement.  

British Airways Chase Visa. If you anticipate big charges to your card, the British Airways Chase Visa offers a current sign up bonus of 50,000 British Airways Avios after your first purchase, and 25,000 more if you spend $10,000 or 50,000 if you spend $20,000 within a year.  In addition, if you spend $30,000 within a year, you receive a free companion ticket on British Airways that can be used in the same class of service as the ticket that you book or redeem.  A principle advantage of this card is that it does not have foreign exchange fees.  While British Airways has high redemption fees, its Avios points can also be used on their partners, including American, Cathay Pacific and Iberia.   The card carries a $95 annual fee.

Starwood American Express Card.  With a current sign up bonus of 25,000 points, this card provides users with free nights at all of Starwood’s over 1,000 hotels worldwide (operated under the Sheraton, Westin, Le Meridien, Four Points, W Hotels and Aloft brands).  Starpoints are valuable for hotel redemptions and discounts (through a cash & points option), or can be transferred to many airlines including Delta and British Airways for a 25% mileage premium. The $65 annual fee is waived the first year.

Chase Hyatt Visa. This card gives new cardholders 2 free nights in any Hyatt property, including Park Hyatts, and renewing cardholders 1 free night in a Category 1 to 4 hotel.  Unlike the Starwood card, the card’s annual fee ($75) is not waived in the first year, but the card does not carry foreign transaction fees.

These are just some of the many ways to accumulate travel rewards through holding certain credit cards.  For a closer examination of the right credit card for you, please visit this page.

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Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

Advertising Disclosure: This site may be compensated for hosting offers.