Prime Rate Credit Cards
Many consumers believe that prime rate credit cards are the best credit cards available. Because the prime rate is based on what that the Federal Reserve Bank charges to loan money to banks, many credit cards that are based on this index are, in fact, very low. However, when a financial instrument is based on that particular index, that indicator dictates what the rates will be. Therefore, if prime rates increase, so do the interest rates on the card. By the same token, when rates go down, rates on the card go down. Or at least that is the assumption. Rarely is that the case, however. Usually when the prime index goes down, the interest on credit cards, does not decrease. The best that can be hoped for is that the index does not climb.
The reality is, prime rate credit cards are simply cards that use the prime rate index as a basis for setting the interest. The margin (or the profit margin) is a more real determinant of whether a particular rate is any good. The margin is how much money the financial institution is making; above prime rates. Financial institutions add the index to the margin to create the interest that is charged to customers. For example, when the margin is 2% (for people who have high credit scores) and the index is at 4%, the interest for the customer becomes 6%. Now, for people with low credit scores the margin may be 9%. When the 11% is added to the index (which is the same as in the above example) of 4%, the rate becomes 15%. In each case, the final number is different although they are both based on the prime rate.
When choosing a good deal on credit cards, there are many other factors to consider other than just looking for prime rate credit cards. In the case of fixed rates, there is a belief that "fixed" means that the interest will not change, no matter what. Not true. In this context, "fixed", simply means that the interest does not go up and down according to a particular index. However, in most cases, the interest can and does usually change in accordance with the terms and conditions of the agreement made at the time a person accepts them. Generally, the agreement will give a specific period of time, say 30 days notice, before the company raises the "fixed" rates to other "fixed rates." Be encouraged though, it is rare that a company would raise rates on an existing account. The exception is, when a person is late or goes over their limit, there is usually a penalty which may include increasing the rates.
The choice made about whether to go with fixed or prime rate credit cards should include a number of factors. Some things a person should consider when analyzing which is better are, how are the annual percentage rates calculated, what happens when a payment is late, whether there is a difference between using the card to pay for something versus getting cash at an automated teller machine, whether there is a grace period for making payments, and whether the company offers any additional benefits. When a person is looking at the annual percentage rate (APR), it is important to know whether there is just one APR or are there multiple APRs. The APR is what percentage of interest a person would pay on the balance if it were stretched out over a years time. The balance on an account is likely to increase and decrease throughout the period, but the stated APR stays the same. It may be a different rates for different activities, but it does not vary from billing cycle to billing cycle like the balance on the account may. There could possibly be a certain APR for purchases, a different one for cash advances, and a third APR when dealing with balance transfers.
Remember a credit card is just that, a card that is used to pay for a purchase on credit. And prime rate credit cards are no different. Owe no man anything, but to love one another: for he that loveth another hath fulfilled the law. (Romans 13:8) When the company also allows a person to get cash from the same card, it is no longer a purchase, but a loan. For the convenience of the ability to get cash quickly (there are no additional forms to complete or hoops to jump through), the person merely pays a premium fee. On the opposite side of the spectrum is the ability to transfer the balance of one card to another. Although it is a benefit to the consumer, the company benefits as well, because the interest that would have been paid to a different company is now coming to them. For that, the company is willing to give a person a much lower starting interest rate; many times these are called introductory rates. The idea is that an individual will eventually make a purchase. Then, the entire balance may be subject to the higher rate. This happens whether a person has fixed or prime rate credit cards.
Although many people believe that they are getting the best deal when they have prime rate credit cards, the other variables discussed in this article should be considered. The prime index is only one of several other indexes that a card could be tied to. The best way to ensure that the interest rates a person gets will be the lowest possible is to do research. Prime rate credit cards can be a good deal, but its not automatic.
The reality is, prime rate credit cards are simply cards that use the prime rate index as a basis for setting the interest. The margin (or the profit margin) is a more real determinant of whether a particular rate is any good. The margin is how much money the financial institution is making; above prime rates. Financial institutions add the index to the margin to create the interest that is charged to customers. For example, when the margin is 2% (for people who have high credit scores) and the index is at 4%, the interest for the customer becomes 6%. Now, for people with low credit scores the margin may be 9%. When the 11% is added to the index (which is the same as in the above example) of 4%, the rate becomes 15%. In each case, the final number is different although they are both based on the prime rate.
When choosing a good deal on credit cards, there are many other factors to consider other than just looking for prime rate credit cards. In the case of fixed rates, there is a belief that "fixed" means that the interest will not change, no matter what. Not true. In this context, "fixed", simply means that the interest does not go up and down according to a particular index. However, in most cases, the interest can and does usually change in accordance with the terms and conditions of the agreement made at the time a person accepts them. Generally, the agreement will give a specific period of time, say 30 days notice, before the company raises the "fixed" rates to other "fixed rates." Be encouraged though, it is rare that a company would raise rates on an existing account. The exception is, when a person is late or goes over their limit, there is usually a penalty which may include increasing the rates.
The choice made about whether to go with fixed or prime rate credit cards should include a number of factors. Some things a person should consider when analyzing which is better are, how are the annual percentage rates calculated, what happens when a payment is late, whether there is a difference between using the card to pay for something versus getting cash at an automated teller machine, whether there is a grace period for making payments, and whether the company offers any additional benefits. When a person is looking at the annual percentage rate (APR), it is important to know whether there is just one APR or are there multiple APRs. The APR is what percentage of interest a person would pay on the balance if it were stretched out over a years time. The balance on an account is likely to increase and decrease throughout the period, but the stated APR stays the same. It may be a different rates for different activities, but it does not vary from billing cycle to billing cycle like the balance on the account may. There could possibly be a certain APR for purchases, a different one for cash advances, and a third APR when dealing with balance transfers.
Remember a credit card is just that, a card that is used to pay for a purchase on credit. And prime rate credit cards are no different. Owe no man anything, but to love one another: for he that loveth another hath fulfilled the law. (Romans 13:8) When the company also allows a person to get cash from the same card, it is no longer a purchase, but a loan. For the convenience of the ability to get cash quickly (there are no additional forms to complete or hoops to jump through), the person merely pays a premium fee. On the opposite side of the spectrum is the ability to transfer the balance of one card to another. Although it is a benefit to the consumer, the company benefits as well, because the interest that would have been paid to a different company is now coming to them. For that, the company is willing to give a person a much lower starting interest rate; many times these are called introductory rates. The idea is that an individual will eventually make a purchase. Then, the entire balance may be subject to the higher rate. This happens whether a person has fixed or prime rate credit cards.
Although many people believe that they are getting the best deal when they have prime rate credit cards, the other variables discussed in this article should be considered. The prime index is only one of several other indexes that a card could be tied to. The best way to ensure that the interest rates a person gets will be the lowest possible is to do research. Prime rate credit cards can be a good deal, but its not automatic.
Prime Rate Credit Cards
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