Interest rates can mean the difference between a good card and a bad one

The credit card industry is certainly aggressive when it comes to trying to obtain new customers. If you have reasonably good credit, you will probably receive several solicitations every month to sign up for a new card. It costs the credit companies, on average, about $100 to obtain a new customer, but once they have one they can be reasonably sure that they will take in thousands of dollars in interest payments from that customer over time. The expense of trying to obtain a new customer is well worth it.

But you shouldn’t just sign up for any card that comes in the mail, as all cards, and all accounts aren’t alike. The most significant things you will need to know about an account are the interest rate charged and the circumstances under which the rate can change.

Below are a few things you should know about credit card interest rates:

• Annual percentage rate - The basic interest rate charged for purchases on the card, expressed as a value that would be charged over one year’s time. 
• Fixed interest rate - This means that the rate charged will not change over time. It is “set” at a particular number and will, in theory, stay there. “Fixed” is relative, as we shall see.
• Variable interest rate - Your rate is tied to some economic index, such as the Prime Rate, or the LIBOR (London Inter-Bank Offered Rate.) As that rate rises or falls, so will the interest rate charged on your account. Ideally, you want your rate to be tied to something that is not under your lender’s control.
• Teaser interest rate - This is a marketing term; you won’t see it in the literature for your card. That’s because this rate is an artificially low one designed to lure you in. It may be as low as 0%, but it will go up in time. If you receive such an offer in the mail, see what the “real” rate will be once the teaser rate expires.

Unfortunately, even “fixed’ rates can change. The fine print on your card application will dictate under what circumstances your rates may go up, and by how much. The fine print isn’t pretty. The following are some circumstances under which your rate may be increased:

• You make a late payment on your account- The credit card companies like it when you pay late. That permits them to add a late fee, which is often as high as $39. Then they can raise your interest rate to the “default interest rate.” The default rate is often as high as 30% per year.
• You make a late payment on some other account - This is known as the “Universal Default Clause.” It says, in effect, that the company may raise your interest rate if you make a late payment to anyone. Pay your electric bill late, and you may see an increase in the “fixed” rate of your credit card.
• Any reason at all - Read it; it’s in there. They just need to give you two weeks’ notice and they can raise your rate for any reason they like.

Ultimately, the card companies call the shots, but some deals are better than others. It helps to read the fine print. Otherwise, you could be paying 30% or more.

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