APR or Annual Percentage Rate is the yearly interest rate charged on your credit card account. It is the cost of a credit or loan that is shown in a percentage form. APR can either be fixed or variable. A fixed APR does not change with different transactions or time period, whereas a variable APR varies according to the time and transactions. According to a credit card survey conducted by the Federal Reserve, almost 58 percent of cards are charged variable rates, while only 42 percent are charged with fixed interest rates.
The Card Act of 2009 introduced guidelines to protect credit card users from unfair practices. For instance, credit card issuers were ordered to increase APR on only particular occasions, with a notice period of atleast 45 days in advance. However, this doesn’t mean that your APR would never be increased. A credit card company can increase your card’s interest rates at any time. In order to keep you informed, we have listed some of the important reasons as to why credit card companies may increase the APR.
Why do banks increase the APR?
- Different time periods
Before applying for a credit card, read the terms and conditions thoroughly. This will save you from an increase in APR as well as other additional charges on your credit account. One of the credit card terms includes different APRs according to the time period. That is, most of the credit card companies offer you 0% or low introductory interest rates on certain transactions for set time duration, in order to lure more and more customers. However, after some time, usually a year, interest rates are increased depending on your credit report. So, be informed about when your credit card issuer can increase the APR.
- Different transactions
It is obvious that you will use your credit card account for different type of transactions, including purchases, balance transfers, foreign exchange, etc. For this, the credit card issuers charge different APRs depending on the type of transaction. For instance, your APR for a purchase transaction would be different from your balance transfer APR. Further, a cash advance APR would be higher than a retail purchase APR, since the credit card issuer does not earn merchant fee on advance transactions, with a higher risk factor.
- Terms and conditions’ violation
Banks can increase the APR, in case you don’t follow the terms and conditions of your credit account. This includes late payments, low credit score, variable interest rates, etc. Your APR can be raised, if you don’t pay your credit bills on time or miss your payments. Banks check different credit accounts and their status quo, before setting the APR. If you have a lot of credit accounts that have a low FICO score, then it is more likely that your interest rates would be high. Variable APRs will subsequently change over time, so know beforehand whether your credit card is charged with a variable interest rate or a fixed APR.
In order to avoid an increase in your interest rates, you should update yourself with all your credit information, by frequently going through your credit report. Also, you must pay all your credit bills on time, so that the credit card issuer does not get a chance to raise your APR. Being informed about how your payments can increase the APR, can help you in the long run as well as save your monthly interest charges.