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