When you choose a new computer or a lap-top for you, of course, you look not just at a model's design. You take into consideration a number of features. You look at the brand, find out the amount of RAM the PC comes with, hard drive space, video and sound cards, choose operating system, speakers, keyboard and mouse.
You wonder what a computer has to deal with credit cards. Here is the explanation. When you focus on a computer's functional characteristics, the main feature will, probably, be hard drive space. When you choose a credit card, interest rate is the determinant feature you consider. Learn basic rules concerning interest rate on your credit card.
Interest Rate Can Change
Most credit cards come with variable interest rate. This means that your rate can sore or drop over time. The changes depend on the prime lending rate fluctuation. Your interest consists of two components: a margin (which is some fixed value based on your creditworthiness) and a variable benchmark rate (which is the prime rate, set by the Fed).
Say you opened an account with a variable rate in June last year. Your rate, according to your credit card agreement, was determined as prime rate plus 5%, for instance. The prime rate in June, 2007 was as high as 8.25%, so, your APR made up 13.25%. This year the prime rate has dropped to 5%, which means that your interest now equals 10%.
But if the Fed increases the prime rate, your interest will go up as well. But your rate cannot skyrocket infinitely high. Your credit card agreement should specify a maximum interest rate that cannot be exceeded, irrespective of the benchmark rate changes. Keep in mind that your issuer reserves the right to raise your APR in their reasonable discretion. However, lenders are obliged by the law to notify you before they alter your any of your credit card terms. They are to send you a two-week' notification.
You can choose a credit card with a fixed interest rate as well. It will not change with the prime rate alterations. But even in case you have a fixed rate, the credit card issuer still reserves the right to change it. And it is hard to tell which one - a fixed or variable is a better interest rate.
Credit Card Interest Is Higher than Other Loan Charges
Do not try to compare your credit card APR and your car loan or mortgage interest rates. Credit card interest is typically higher. Even a low rate card offer can carry a higher interest than you pay for your auto loan. The thing is that debts are divided into secured and unsecured. If debt is characterized as secured, in case you fail to fulfill your debt obligation, the lender is eligible to seizing specific property (a car or home, for instance).
In case with unsecured loans, the creditor does not have this right. If you do not pay the bills according to the contract, the lender can only report to debt collection agencies, hurt your credit report and damage your credit score. Since credit card debt is considered to be unsecured and credit card companies take more risk lending you money, they charge higher rates and fees for their services.
You Cannot Deduct Credit Card Interest on Your Taxes
Unlike deductible mortgage interest, your credit card interest is not tax deductible. Just remember about the advantages of your tax deduction on a home loan, for example. You can raise some $25,000 from your mortgage taxes instead of charging this amount of money on your credit card.
These are the basic things you should know about your interest rate.
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