Determining the best bank credit card rates can be a somewhat challenging task because rates change so frequently. You may have a variable rate credit card from one bank that starts out with an interest rate of 14.99% only to find out that it is a half a point higher six months down the road. You could also have a fixed rate card on which you pay 15.5% while a friend with the exact same card pays 16.9%.
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Perhaps a better measure would be for consumers to look at the average interest rate across the board and then find cards from banks at or below the average. Bankrate.com is just one of many financial websites that tracks such statistics on a weekly basis.
For the week of March 21, 2012, they listed the average fixed rate at 13.81% and the average variable rate at 14.52%. The fixed rate is up slightly from the start of the year while the variable rate is down slightly.
How Credit Card Rates are Determined
There are two types of interest rates used by banks for their credit card offerings, fixed rate and variable rate. Both start with a number known as the Prime Rate. Some use the prime rate has published daily in the Wall Street Journal while others use the one published by the Federal Reserve. Regardless, The Federal Reserve Bank of San Francisco defines the Prime Rate as the average rate charged by the country’s top 25 commercial banks to their best customers.
With the fixed rate, the bank adds a certain percentage to the Prime Rate and then charges that combined percentage indefinitely. It’s called fixed because it does not fluctuate from month to month along with the Prime Rate. According to the Federal Reserve it can still be changed as long as the bank notifies credit cardholders in accordance with the credit card regulations of 2009.
The variable rate is also based on the Prime Rate, but fluctuates right along with it. For example, you may have a variable rate card that charges interest based on the Prime Rate plus 5%.
If the Prime Rate goes down, so does the interest you’re charged for the month. The opposite is also true.
Banks Charge Different Rates for Different Customer
The way banks treat individual consumers is one of the main reasons why it’s difficult to say who has the best rates on the market. The advertised rate you see on television or credit card offer you get in the mail is based on the best possible scenario of a consumer with an excellent credit score and a high income to expenditure ratio. Very few customers achieve the ideal financial rating that gets the lowest possible interest rate. So that rate more or less acts as a starting point.
The bank will check the credit report of every applicant and, along with that applicant’s credit score, determine what his or her final interest rate will be. Since banks give weight to credit reports differently, it’s possible to have two or three separate banks offer different interest rates for similar credit cards.
Banks Charge Different Rates across Different Cards
In addition to separate banks charging different interest rates, a single bank may also have several different interest rates across its entire selection of credit cards. This is largely because the different types of credit cards are targeting different types of consumers.
For example, a top-of-the-line rewards card with high spending limits and many extra incentives is usually aimed at wealthier consumers with good credit histories. Their more stable financial position allows them a lower interest rate.
On the other hand, a basic credit card with a higher interest rate and very few extra perks will be marketed to consumers with poor credit histories and less income. Such consumers bear a higher interest rate because they also present a greater risk of default.
Credit card interest is a lot like car insurance in that the greater risk you pose to your bank, the higher your interest rate is going to be.
Finding the bank with the best credit card rate is a matter of taking the time to do the research. But because interest rates change so rapidly, it’s wise to look at the total package of everything a particular credit cards offering. All those additional things will be just as important as the interest rate.
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