What is interest?
Interest is the lenderвЂ™s fee for allowing you to use its money. It is expressed as a percentage of the loan amount. For example, a 5% annual percentage rate (APR) on a $10,000 loan would cost you $500 per year (5% x $10,000 = $500). A 7% APR means you would pay $700 per year for use of the money.
What is fixed rate interest?
Fixed rate interest does not fluctuate according to changes in an underlying index. The most common index used is the prime rate, though some card issuers tie variable interest rates to the London Interbank Offered Rate (LIBOR) or the federal funds rate.
A fixed rate on a credit card can still change at any time with 15 daysвЂ™ notice. It can also change if you make a late payment or do anything else that triggers a penalty rate increase.
Many cards impose a much higher default or penalty rate if a cardholder does not honor the terms of the credit agreement. That could include doing such things as making a late payment, exceeding the credit limit, or allowing your credit score to drop. To avoid the increase, understand exactly when it could be imposed and avoid doing anything that could trigger it.
What is variable rate interest?
Unlike fixed rate interest, a variable rate moves up and down based on changes in an underlying interest rate index. Typically, a variable interest rate will be quoted as a certain number of percentage points above the index. For example, if your quoted rate is prime + 7.99% installment loans Indiana online, and prime is currently 6%, then your rate would be 13.99% (6% + 7.99% = 13.99% APR). If prime increases to 8%, then your rate would increase to 15.99% (8% + 7.99% =15.99% APR).
Some credit cards impose a “rate floor.” This means that the card company has a minimum APRвЂ”no matter what happens to the index, your APR will never go lower than that.
What is the periodic interest rate?
The periodic interest rate is your APR divided by 365 (days per year). For example, an 18% interest rate divided by 365 equals a periodic rate of approximately .04931%. The credit card company multiplies that rate by your average daily balance (all your charges, minus your payments, divided by the number of days in the month) to obtain your monthly finance charges.
What is a “minimum payment”?
The minimum payment is the minimum amount you have to pay to meet the terms of your credit agreement and avoid a fee or penalty rate increase. According to guidelines, a minimum payment should cover interest, any fees or extra charges and at least 1% of the principal balanceвЂ”this results in a minimum payment of about 4% of the balance.
How can I figure out how long it will take me to pay off a balance?
The easiest way to estimate how long it will take you to get out of debt is to use one of the many free calculators available online, such as the one at Bankrate.com. When you input your APR, balance and minimum payment, the calculator reveals how long it will take you to get out of debt by paying only the minimum or by making larger payments.
Who provides credit?
Credit is available from many legitimate sourcesвЂ”banks, credit unions, credit card companies, finance companies, retailers, mortgage lenders and others.
There are also many lenders that offer loans designed to make the most money off the borrower. They prey on people who are not aware of other loan options or who might have a hard time qualifying for credit from a reputable lender.
How do I get credit?
If you are just beginning to establish credit, try:
- Applying for a retailerвЂ™s credit card or a gas card, which can be easier to qualify for than a Visa or MasterCard.
- Applying for credit with a lender you already do business with, such as your bank or credit union.
- Establishing utility and other services in your name.
- Finding a friend or relative with good credit to co-sign your credit application. (A co-signer promises to pay the debt if you donвЂ™t.)
- Getting a secured credit card.
ItвЂ™s very important that the businesses you make payments to report your activity to one or more of the three national credit reporting companies. If itвЂ™s not reported, you wonвЂ™t establish a record for future lenders to base their decisions upon.
How can I get more credit?
If you already have credit, you could ask for a credit limit increase. Or you could apply for new credit. If you manage your credit responsibly, you may also get offers for new credit.