Are you thinking about getting a credit card? If so, it’s important that you understand how interest rates work.
A credit card’s interest rate will determine how much a purchase will cost you over the course of a year. This will help you to better manage your finance by carefully budgeting for these charges. Plus, you’ll be able to make more sensible decisions.
So, what is an interest rate?
The interest rate on a credit card is normally included within the APR, which stands for annual percentage rate. This percentage is the combined amount of interest and payable fees you’ll pay on the money you borrow from your credit card provider, over the course of a year.
For example, if you’re looking at a credit card with an APR of 20%, any purchases you make and don’t pay back for a year will cost you an extra 20%. So, if you bought something that cost £1,000, you’ll be charged an additional £200 in interest.
Many credit card providers encourage people to pay back what they’ve borrowed earlier by offering them a reduced interest rate. So again, if you spent £1,000 and paid it back within 3 months, you’d pay only a quarter of your annual percentage rate. Instead of the £200 above, you would pay £50 in interest.
Are there different types of interest rates?
Yes. The two main types of interest rates on credit cards are fixed and variable.
Fixed interest rates are what they say on the tin: a fixed percentage. This guarantees you a set interest rate on all your purchases, allowing you to manage your Finances effectively.
Variable interest rates fluctuate in line with the market. This can be good if the interest rate drops and you can take advantage of paying lower interest. However, you must be in a financial position that would allow you to pay an increased rate if it changed.
How do I get the best interest rates?
It’s important to note that if you’re browsing online for different credit card deals, you may not be offered the same APR as you’ve seen on a company’s website. This is because rates change in line with your credit rating.
Those with a perfect credit rating will benefit from the lowest APR’s. Those with a less-than-perfect credit rating will have to pay the highest interest rates. So to get the best rates on a credit card, you should try to Boost your credit score.
Is a credit card right for me?
Credit cards can be a hugely beneficial financial tool. They allow you to pay for items in small monthly instalments, help to improve your credit rating and can even earn you rewards as you spend.
To figure out if a credit card is right for you, you need a good understanding of how the APR works as well as your current credit rating. This will allow you to scour the market for other potential options and make a fully informed decision about whether to go ahead.