## How to Understand All the Interest Rates On Your Credit Card

written by: •edited by: Donna Cosmato•updated: 7/6/2011

Most people these days have at least one credit card; some have numerous. How you use that credit card for different types of purchases is important. Jean Scheid looks at how to understand all the interest rates on your credit card and what they all mean.

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### Why So Many Different Rates?

You may have a credit card with an interest rate of 5.9% but what types of purchases actually get that 5.9% interest rate? Credit card companies are under the gun these days by the government for the numerous interest rates they have on their credit cards. Interest rates can be different for general purchases, late fees, and cash advances.

Credit card customers should take the time and read the terms and agreement of any credit card before signing on the dotted line. Unfortunately, most people don't read the fine print and when they receive the credit card, they start using it. It has long been the defense of the credit card companies that they do reveal each and every term of service and interest rate calculations within the initial credit card agreement. That's true, so read the fine print first. If you don't understand it, call the credit card company and ask them to give you a verbal explanation of all the terms and interest rate that apply to the card. You may think you have a low interest rate for your credit card, but it might only apply if you pay the balance in full each month.

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### Credit Card Interest Rates

To help readers of this article understand credit card interest rates, Jean Scheid uses her personal MasterCard as an example. Initially, the card offered a 5.9% interest rate and balance transfers from another card were free. As long as the entire monthly balance due was paid in full, by the due date, the interest rate was 5.9% on all charges made on the card.

If Jean used the card for a large expense where she was unable to pay the entire balance in full each month, the interest rate would jump to 27.24%. That high interest rate would remain each month until the entire balance was paid in full. In addition, any charges made on the card while the first large expense is being paid off are not 5.9% but the higher 27.24%. So in effect, Jean only receives the 5.9% if she pays the entire balance in full every month.

Cash advances on Jean's card clearly state the interest rate will be 27.24% all the time. A cash advance can be done at an ATM machine or by the checks credit card companies send you; both are considered cash advances. Before you decide to use your credit card for a cash advance, read the fine print, your interest rate is not what you might think.

If a monthly payment is received after the due date, even if the monthly balance is paid in full, a 27.24% finance charge is tacked onto Jean's account along with late fees. Late fees vary from card to card so make sure you know how much extra you will be paying if you send in your payment late.

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### Be a Smart Credit Card Holder

As you can see, with Jean's card, the 5.9% interest rate can change depending on how the card is used and paid. Every credit card statement, even online statements, have a section that defines the fees and interest rates. It is usually on the back of the credit card statement and might be called: Calculation of Balances and Fees.

Be a smart credit card holder by using your credit card in moderation and paying the entire balance each month in full to receive your discounted interest rate. If the credit card you have now has high interest rate, find one that is lower and transfer your balances to the new card. Balance transfers are usually free initially, but not later.

In today's economy, it's tough to keep credit card balances low. If you carry a balance on your credit card, make sure you understand what you are really paying and if you don't, call the credit card company. Understanding all the interest rates on your credit card can be confusing to read and understand. On the bright side, the government has passed laws applicable to some credit card companies who charge high interest rates in an attempt to regulate the high fees and charges credit card consumers have been forced to pay.

Photo credit: Highway Robbery by Melania Flickr Creative Commons