Credit Card Rates

There are several different methods adopted by credit card issuers for calculating the applicable credit card rate.

The most common calculation of the rate is to charge interest each month on the outstanding balance of between 1% and 2%. This equates to an annual percentage rate of between 13% and 25%. Some credit card issuers offer lower rates of interest for higher usage of the credit card facility. Also some companies make annual charge for issuing the cards, which should be taken into account when making a decision of which card to apply for.

The APR or annual percentage rate on credit cards is much higher than the interest rate charged on personal loans and mortgages. This is because the original intended use of a credit card was to cover short term borrowing requirements perhaps until receipt of a monthly pay cheque or for periods up to 6 months. In these circumstances although the interest rate is high the actual cost should not be a burden because of the short time the money is borrowed for. With a personal loan the minimum term is 1 to 3 years and with a mortgage the borrowing is usually long term, say, 20/25 years. With the latter the loan is secured on property and therefore the risk is lower from the bank's point of view.

One advantage of purchasing goods using a credit card is that there is an element of interest free borrowing because most credit card companies do not start charging interest until the due date for payment, which is shown on the monthly credit card statement.