How to Understand Credit Card Rates

Knowing how card rates work in practice can save you quite a bit of money in interest and fees. It’s not as simple as knowing what the interest rate charged on the card will be.

Each credit lender has different fees and large credit lenders often have different fees and interest rates for each card they offer.

Fees are based on the type of card and also on your credit history. Lenders are required by law to disclose the fees they charge both on the monthly statement and in an annual disclosure. Fees can increase at any time and knowing the fee structure is part of understanding how card rates work.


The Annual Percentage Rate (APR) is used to calculate the finance charge that appears on your monthly bill. Credit card debt can become a quagmire when high APR on your credit account results in a monthly finance charge that is greater than the minimum payment required. Most credit card statements will list the interest rate both as APR and as a Daily Periodic Rate.

As a consumer, you may view using your credit card as “making payment” or as “deferring payment”. The lender views your charges as a loan and the monthly finance charge is the interest you pay for the convenience of buy now – pay later.

If you know how credit card rates work, it should be easy to calculate the interest charged on your credit debt. Problem is, some lenders use the APR divided by 365 (days per year) to calculate daily interest rates while other lenders use 360 as the number of days per year.

Clearly, those lenders using 360 are charging a higher daily rate. Another fact difficult to calculate is the number of days in a billing cycle. Some lenders use 30 as the standard while others use the actual number of days in that month.

Though the APR accounts for most of the monthly fees on your credit card, there are other fees to watch out for. If you never pay a bill late, the late fee may not concern you.

If you find a card where the rewards program is something you can use frequently, an annual fee may be reasonable for that particular account. Some common fees charged by credit lenders are:

Annual Fee

The annual fee card had almost disappeared in recent years but new credit laws that went into effect in 2010 have led to a resurrection of annual fees by many lenders. If you pay an annual fee, the charge may be as little as $25 annually or as high as $150 each year.

This fee is charged to your credit limit whether you use the credit card or not. If you have used a card with no problems for a year or more, the lender may be willing to waive the annual fee if you request it.

Late Fee

If you pay an hour after the due date, you will be charge a late. If you are someone who often forgets to mail things on time you should sign up with the credit card company to enable paying through their website. Late fees have risen recently with $39 now being he most common fee charged for late payments.

Late fee charges can be tricky with some lenders. Some lenders require payment on the same day each month. Others change the date due either monthly or every few months.

If you always pay your monthly payment just before it’s due date, be very careful to check the date due each month. A change in that date can result in a late fee and that is a waste of your money as well as a black mark on your credit file.

Over Limit Fee

When credit cards became daily-use cards a consumer who tried to charge more than his credit line was declined.

The policy was to call the lender (usually from the store where the purchase was being made) and if the card holder was current in payments, the one time extension in credit limit was verbally approved.

The rapid expansion of credit use led lenders to simply allow account holders to charge a purchase that put them slightly over their credit spending limit.

This is an important point in understanding card rates because the same automatic permission to go over the spending level is in place today but carries a hefty fee.

If you have $400 remaining on your spending limit and find a great sale on a television for $420, the charge will go through. However, your monthly statement will show a fee of $39 or higher for the privilege of going $20 over your spending limit.

The best option for consumers is to notify the credit card company that you do not want to be allowed charges over your stated spending limit.

If you have a large purchase planned that might cause your charges to go over your current spending limit, call your lender and request a temporary credit line spending increase for that purchase.

If you have a good payment record with that lender, your request will be granted. When you start to understand how card rates work in practice, you will also learn the things you can do to keep those rates to a minimum.

So, now when you understand card rates I recommend you to read my tips on consolidation even if you don’t plan to consolidate your credit cards in the near future.