Credit Card Interest and Balance Transfers
Teaser Rates, Cash Advances and Unpaid Balances increase Expense
Oct 13, 2009
Credit cards charge interest on unpaid balances. For cards with a grace period (the time between the statement date and when the bill is due), no interest is charged if the balance is paid off before the due date.
If the card is not fully paid off, interest is charged back to the date that item was charged. Interest rates on credit cards are typically higher than interest rates on other debt.
Cash Advances on Credit Card Accounts
If a consumer takes a cash advance on a credit card, typically interest is charged from the date of the transaction, and there is no grace period. Consumers should read the fine print to be sure the rules on their accounts.
Unlike credit card purchases, final payments on a cash advance incur interest up to the date of payment, and therefore interest for a cash advance may appear on the following month’s statement even after the advance is paid off.
Credit Card Balance Transfers and Teaser Rates
Credit card “checks” or balance transfers are considered cash advances against an account. These transactions may carry a lower interest rate, but the terms are similar to an advance.
Often these accounts will have a “teaser rate” which is a lower rate for a specified time. If the account is paid off after the expiration of the teaser rate, the account reverts to the cash advance rate.
Credit Card Balance Transfer Transaction Fee
Many cards also carry a transaction fee, which may have a minimum amount, and may have a maximum, or may not. The fees can vary from 1% or more of the loan amount. For instance, for a loan amount of $10,000, a 5% fee would be $500, added immediately to the credit card and subject to interest if not paid.
This fee can immensely impact the effective interest rate of the transaction. A teaser rate of 5% becomes much higher when the impact of the fee is concerned. Consider the following example:
Example of a Transaction Fee Interest Rate Calculation
A consumer writes a check with a teaser rate of 5% for $12,000, with a 5% transaction fee, and plans to pay off the balance in one year, at $1,000 per month, plus $600 for the fee. The consumer might believe this will result in less than a 10% interest rate, but the consumer is mistaken.
Because of the compounding effects of interest, the actual amount needed to pay off the loan is $1,030 each month for 12 months, plus the fee. Since the loan is being amortized (paid down) over the year, the average balance is closer to $7,000, and interest would total $357, plus the $600 fee. Interest and fees together would be $957, which is a 14% rate.
If there are late payments, or the account goes over limit, the account may shift to a higher rate. Consumers should carefully review the terms of a credit card deal to make sure it makes sense for them.
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