How Interest Rates Affect Your Debt

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What Are Interest Rates?

The annual percentage rate (APR), also known as the interest rate, is the amount of interest you are charged on your credit card for purchases you make using your card. The APR is decidedly solely by your credit card company.

On the other hand, the average prime rate is used by banks to determine how much interest they will charge on loans. A bank or credit card company does not make its own average prime rate, but rather it is calculated by an external source (The Wall Street Journal).

What Are the Different Kind of Interest Rates that Can Be Offered on Credit Cards?

There are several different types of interest rates to consider when selecting a credit card that best suits your interests:

What Could Cause My Interest Rate to Increase?

The primary reason your lender can hand you a penalty rate, that is an increase in your interest rate on your credit card, is because you have proven to be a risky investment for the lender (i.e., they are less sure you will pay back all the money you owe). There are a number of factors that can make you look like a risky investment.

Making late payments or no payment at all will most likely lead to the credit card company increasing your APR. If you do not pay the first time around, you will probably have to pay more in the future. Keep in mind that making payments does not just apply to your credit cards. Your lender has access to your credit report and might consider increasing your APR if it sees that you have recently defaulted on a loan.

Be aware, though, that even though lenders will probably increase your interest rate if prove to be a risky investment, in reality they are not legally obligated to have a reason to institute an increase in your APR.

Do I Have Any Legal Protections When it Comes to a Change in My Interest Rates?

Your lender is legally required to give you at least a 15-day notice when they are going to change your interest rates. If your lender does not do this or you feel they might have violated some other aspect of fair business practice, you may want to consult an attorney who specializes in consumer credit. Your attorney can advise you of your rights and let you know if you may be entitled to some type of compensation in a lawsuit against your creditor.

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Last Modified: 12-20-2012 04:26 PM PST

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