Interest Rate
Interest Rate refers to the percentage charged by a lender on the amount borrowed, or earned on deposited funds, over a specific period. In the context of credit cards, it is the cost you pay to borrow money if you carry a balance from month to month. This is evaluated within APR, Interest & Fees.
Plain-Language Meaning
An interest rate is the cost of borrowing money, shown as a percentage of the amount borrowed. For credit cards, it determines how much extra you pay if you do not pay off your full balance each month.
Practical Example
If you use your credit card to make a purchase and do not pay off the full balance by the due date, you will be charged interest on the remaining amount based on the card’s interest rate.
What It Does Not Mean
Interest rate does not refer to the total amount of interest paid or earned, nor does it include other fees or charges that may apply to a credit card account.
How the System Uses It
The system uses the interest rate to calculate the amount of interest charged on outstanding credit card balances. This rate is applied to the unpaid portion of your balance, typically on a daily or monthly basis, to determine how much you owe in addition to your original purchases.
Common Misconceptions
- “Interest rate and APR are the same thing.” While related, APR may include additional fees, whereas the interest rate is specifically the cost of borrowing.
- “You only pay interest if you use your credit card.” Interest is only charged if you carry a balance past the due date, not simply for using the card.
- “Interest rates never change.” Credit card interest rates can change based on the card’s terms or market conditions.
Related Pages
Related Glossary Terms
FAQ
- How is the interest rate on a credit card determined? The interest rate is set by the credit card issuer and can be influenced by factors such as your creditworthiness, the type of card, and prevailing market rates.
- Is the interest rate applied to all credit card transactions? The interest rate typically applies to balances that are not paid in full by the due date, but some transactions like cash advances may have different rates.