The Ins and Outs of How Interest Rates Work

Credit cards have become a staple in American society. This is why it is astonishing to me that so many Americans are under-informed regarding these pieces of plastic! It seems as though the part of charge card accounts that Americans don't quite understand is the interest rates on them. Interest rates are pretty simple to understand. They are how the banks make cash when loaning money to consumers through credit card accounts.

When Americans use their credit card accounts, the amount borrowed will be added to the total balance on the charge card account. However, the balance on a credit card is usually made up of separate sections. This is where the annual percentage rates tend to get a bit confusing for people. Each section of the balance on a charge card account will be charged a different APR. Here are the most common types of interest associated with credit cards:

Standard interest rate: The standard interest rate on a credit card is also commonly called the purchase rate. This is because this is the interest rate that consumers will have to pay on balances accumulated by using the charge card for standard purchases. These standard purchases include things like gas, food and entertainment.

Introductory interest rate: Because of the overwhelming competition in the credit card account industry, banks have been forced to come up with new ways to attract clients. One of these ways is by providing introductory annual percentage rates with their charge cards. Introductory APRs are APRs that take effect the day the account is opened and will generally last for 6 to 12 months. In rare occasions, people will be able to find credit cards like the Discover More Card - 18 month balance transfer promotion where the introductory annual percentage rate will last for longer than 12 months. Introductory interest rates are usually between 0% and 2.9% and once they expire, all balances accrued during the introductory period will then be charged the standard APR for the debts.

Balance transfer interest rate: The balance transfer annual percentage rate is another that came about due to overwhelming competition in the charge card account industry. There are some special credit card accounts that allow people to transfer a balance from another credit card account to them. These balance transfer credit card accounts will come with a special annual percentage rate called the balance transfer APR. This is the rate of interest that Americans will pay for balance accrued by using their credit card for balance transfers.

Cash advance APR: The cash advance APR is usually one of the highest APRs on a credit card account. The cash advance interest rate will be charged to balances accrued by using charge card accounts for cash advances. A cash advance is any transaction where the consumer gets cash back. These transactions can take place at an ATM, over the phone or even at the point of sale in many stores.

Default annual percentage rate: The default interest rate is the highest APR on a credit card account and one that people should generally try to avoid. The default interest rate takes effect only if the consumer defaults on their credit card account. Once the consumer defaults, all balances will be charged the default APR. Some ways this can happen is by making late payments or spending more than the credit limit on the charge card account.