Understanding credit card rates
What are promotional rates? How does a penalty rate work? A breakdown.
Credit card accounts may offer a number of different rates, but how each one applies depends on how you use the card. By understanding credit card rates better, you may be able to use them to your advantage and avoid a lot of frustration. Here’s an explanation of the different credit card rates you might have, what they mean and where to find them.
The different types of rates:
1. Standard rates
Standard or contract rates are your regular credit card rates. They’re part of the contract you agree to when you accept a credit card, and they’re listed on your monthly statement. It’s important, however, to know that these rates can still change. Issuers typically reserve the right to change rates based on your credit history, market conditions and other reasons. If your rate changes, your issuer is generally required to notify you first. They explain the reason for the increase or decrease and let you know about your options, including whether you can opt out of the rate change.
2. Variable rates
These rates are tied to an index, such as a U.S. Prime Rate, and can go up or down if the index changes, depending on how often your credit card issuer updates the rates. Check your account agreement to see if your rates may update quarterly or monthly.
3. The penalty rate
This rate can be imposed as a result of occurrences such as late payments. Check your account agreement to see whether your issuer may impose a penalty rate—and if so, what you need to do to avoid it. The best defense against a penalty rate is to always pay your bill on time. If you get hit with an increased rate, though, there’s good news: Not all penalty rates last forever. Issuers are required to review your account periodically to determine whether the penalty APR can be reduced.
4. Cash advance rate
This rate is applied to transactions considered cash advances—that’s when you use your credit card for a loan against your credit line. This can be when you use your credit card to get cash from the bank or an ATM, or to purchase foreign currency or casino gaming chips. It also includes when you write checks the credit card company sends you or transfer funds from your credit line into a deposit account. The cash advance rate is usually higher than the rate applied to purchases.
5. Promotional rates
Promotional rates (sometimes called teaser rates) are temporary rates that encourage you to use your card. These rates can be offered as a special deal with an existing card or as an introductory rate when you apply for a new card. They’re a great way to save—but make sure you check out the details, including:
- The expiration date. If you try to pay off your debt while the rate is low, be sure you know exactly how long you have until the promotional rate expires.
- How payments are allocated. If you have balances with different rates (such as one balance for purchases but another for cash advances), credit card issuers are required to apply any amount you pay above your minimum payment toward balances with higher rates. However, they are permitted to apply your minimum payment to the balance with the lowest rate first. Check your account agreement to see how your credit card issuer allocates minimum payments.
- The rate after the promotional rate ends. This is usually the standard or contract rate.
Where you find your rates:
- Your account agreement: You receive a copy of this in the mail when you get your new card. It details all of the interest rates that apply when the account is opened and what circumstances might cause them to change. If you don’t know where your agreement is, contact your credit card provider.
- Your statement: Online and paper statements list your current rates, as well as any promotional rates, penalty rates, cash advance rates and other information about your account.
- Your mailbox: If there is a change to your rate, you are notified in a separate letter or in an insert that comes with your statement. You probably get a lot of mail about credit cards, but it’s a good idea to pay attention to communications from your credit card issuer.
- The customer service phone number: If you can’t find an answer, call the number on the back of your card and talk to a customer representative.
The next time you review your credit card statement, take an extra few minutes to read about the rates that apply to your account. Knowing this information and understanding the nuances of credit card rates can help you stay in control of your finances.