FACT SHEET 4 Choose the Best Credit Card Interest Rate Only 35% of consumers compare offers before applying for a credit card and only 58% review their credit 1 report. Most U.S. consumers use credit cards. But, many don't pay attention to the interest rate on their credit cards, or to the total amount of interest they pay every year. Choosing a credit card with the lowest interest rate can save you money. Forty-four percent of all U.S. families had an outstanding balance on some type of credit card after paying their most recent bill. The median balance for these families was $1900 (in 2001 2 dollars). How to find a lower credit card interest rate Shopping for the best credit card value can be complicated. Different issuers of national bank cards such as VISA, MasterCard, and Discover charge different interest rates. They also use different methods to calculate finance charges. Under the federal Truth-inLending Act, creditors must disclose the interest rate or the Annual Percentage Rate (APR). The APR measures the cost of credit as a yearly interest rate. APRs on credit cards can vary from five to 25 percent. If you're like most people and carry a balance on your credit card at least sometimes, the APR can make a big difference. The following chart shows how much a $2500 balance would cost you at different APRs if you didn't pay it off right away. How much you’d pay in finance charges on a $2500 balance after... APR 6 Months 18 Months 36 Months 19.8% 14.0% http://www.ace.uiuc.edu/cfe/ccs/index.html $245.29 $171.30 $ 96.64 $718.35 $485.40 $264.77 $1374.46 $ 874.53 $ 448.81 8.0% Credit card lists You can get lists of credit cards with low interest rates from the group below. CardWeb P.O. Box1700, Frederick, MD 21702; 1-800-344-7714 Publishes a monthly credit card report for consumers and businesses. The report costs about $5. It’s also on the Web at: http://www.cardweb.com The effective rate can actually be much higher, depending upon how the finance charges are calculated. Whether you paid last month's balance and whether you have new purchases can both affect your finance charges. The chart on this page compares different methods of figuring finance charges. In the example, the APR is 18% a year, or 1.5% a month. Using the various methods, the finance charge could be as little as $1.50 or as much as $6.00. In the Previous Balance Method, your finance charge depends on last month's balance. Payments and purchases you make this month don't affect your finance charges. This method can be costly. Most issuers use the Average Daily Balance Method, including newly billed purchases, to figure your finance charges. They actually figure your balance every day and average that across the month. New purchases increase your finance charges. And, if you carry a balance from last month, you don't have a grace period on anything that month — you're charged interest from the first day you buy an item. Some card issuers use the Average Daily Balance Method but exclude newly billed purchases. That method would cost you less in months when you had new charges. The Adjusted Balance Method takes into account payments you've made but not new purchases. You’ll often pay the lowest finance charges with this method. Watch out for the "Two Cycle" Average Daily Balance Method. It uses the total of the average daily balances for two billing cycles and costs you more than other average daily balance methods. 1 Hogarth, J.M., Hilgert, M.A., & Schuchardt, J. (2002, November). Money Managers – The Good, the Bad, and the Lost. Proceedings of the Association for Financial Counseling and Planning Education, 12-23. 2 Aizcorbe, A.M., Kennickell, A.B., & Moore, K.B. (2003). Recent Changes in U.S. Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances. Federal Reserve Bulletin, January, 1-32, retrieved at: http://www.federalreserve.gove/pubs/bulletin/2 003/0103lead.pdf. Written by Susan Taylor, Consumer and Family Economics Educator, Kankakee Extension Center, University of Illinois Extension, September 1997. Updated 2004. For more information on credit, see other Credit Card Smarts fact sheets. A related fact sheet is “Choose the Best Credit Card.” Method Finance Charge Figured By: Average Daily Balance (with new purchases) Average Daily Balance (without new purchases) Adjusted Balance Previous Balance * ** *** **** APR 18% 18% 18% 18% Previous Balance $400 $400 $400 $400 New Purchases $50 on 19th of month $50 on 19th of month Not applicable Not applicable Payment $300 on 15th of month $300 on 15th of month $300 $300 Average Daily Balance $270 $250 Not applicable Not applicable Finance Charges $4.05* $3.75** $1.50*** $6.00**** [($400 x 15 days) + ($100 x 3 days) + ($150 x 12 days)] divided by 30 days = $270 x 1.5% = $4.05. [($400 x 15 days) + ($100 x 15 days)] divided by 30 days = $250 x 1.5% = $3.75. ($400 - $300) = $100 x 1.5% = $1.50. $400 x 1.5% = $6.00.