What is interest?
Interest is the lenderвЂ™s fee for allowing you to use its money. It is expressed as a percentage of the loan amount. For example, a 5% annual percentage rate (APR) on a $10,000 loan would cost you $500 per year (5% x $10,000 = $500). A 7% APR means you would pay $700 per year for use of the money.
What is fixed rate interest?
Fixed rate interest does not fluctuate according to changes in an underlying index. The most common index used is the prime rate, though some card issuers tie variable interest rates to the London Interbank Offered Rate (LIBOR) or the federal funds rate.
A fixed rate on a credit card can still change at any time with 15 daysвЂ™ notice. It can also change if you make a late payment or do anything else that triggers a penalty rate increase.
Many cards impose a much higher default or penalty rate if a cardholder does not honor the terms of the credit agreement. That could include doing such things as making a late payment, exceeding the credit limit, or allowing your credit score to drop. To avoid the increase, understand exactly when it could be imposed and avoid doing anything that could trigger it.
What is variable rate interest?
Unlike fixed rate interest, a variable rate moves up and down based on changes in an underlying interest rate index. Typically, a variable interest rate will be quoted as a certain number of percentage points above the index. For example, if your quoted rate is prime + 7.99%, and prime is currently 6%, then your rate would be 13.99% (6% + 7.99% = 13.99% APR). If prime increases to 8%, then your rate would increase to 15.99% (8% + 7.99% =15.99% APR).
Some credit cards impose a «rate floor.» This means that the card company has a minimum APRвЂ”no matter what happens to the index, your APR will never go lower than that.
What is the periodic interest rate?
The periodic interest rate is your APR divided by 365 (days per year).