Credit Card and APR Rate

Each bank sets its own terms for the credit cards it issues. Further, a given bank may set different terms for different cardholders, according to their income and credit history (a financial report card of sorts that shows how much money a person owes to his various creditors and how reliable he is about paying his bills on time). If a person has a low income and a poor credit history, the bank must assume that extending credit to him is risky, and it will likely charge him a high interest rate in order to offset this risk (or it might deny his application altogether). On the other hand, if someone has a fairly high income and an exemplary credit history, the bank will rank him as a safe person to extend credit to and will likely offer a lower interest rate.

Annual Percentage Rate (APR)
Annual percentage rate (APR) is one of the most important variables to consider when using a credit card. The APR on the card is the amount of interest, such as 15 percent, the bank will charge the cardholder per year on her revolving account balance. The higher the credit card's APR, the more it costs to carry a balance on that card.

Credit cards usually specify one APR for purchases and another, higher APR for cash advances. With a cash advance the cardholder withdraws money against his credit limit. To do so, he can make the transaction with a bank teller, or he can insert his credit card into an ATM (automated teller machine), enter his PIN (personal identification number), and withdraw cash. Usually only a portion of the card's total credit limit is available for cash advances. In addition, many card-issuing banks charge a cash-advance fee, typically calculated as 2 to 3 percent of the total amount of the advance.

Minimum Payments
Credit card holders receive a monthly statement, or bill, which summarizes the activity (purchases and payments) on the card for that month. The statement also specifies the minimum payment the cardholder must make for that billing period in order to keep the account in good standing. The minimum payment tends to be just a tiny amount (such as 2 to 4 percent) of the total balance; often it is only slightly more than the interest charged on the balance for the same period. Thus, if the cardholder only pays the minimum each month while the balance continues to accrue interest, it can take him years, even decades, to pay off the debt.

Late Fees
A credit card statement stipulates the date by which the payment must be received by the issuing bank. If the payment is late, the issuing bank will charge the cardholder a late fee. Late payments can also result in other penalties, such as an increase in the card's APR and a blemish on the cardholder's credit rating.

Over-Limit Penalties
If the cardholder's account balance exceeds his or her preset credit limit, the bank may charge an over-limit penalty for that billing cycle. In many cases, when someone tries to make a purchase that will put his or her account over the limit, the card will be denied at the point of sale; but if the purchase is only a few dollars over the limit, the transaction will sometimes go through. Also, sometimes it is interest charges that put the balance over the limit.