Glencoe Keyboarding with Computer Applications

MATH CONNECTION: Explain Credit Card Interest Rates

Introduction
Learn more about credit card interest rates.

Directions
Read the information below and apply what you learn to answer the questions. Key your answers into the spaces provided.

The Credit System Credit card companies earn their money by charging you interest. Interest is the charge or fee for a money loan. Interest is usually calculated as a percentage of the amount of money that is loaned.

Interest rates are usually charged as an annual percentage rate (APR). Banks, lending companies, and credit card companies come up with the APR they charge based on the federal government's "prime rate." The prime rate is raised or lowered by the government from time to time depending on economic factors, in order to stabilize the economy.

On top of the prime rate, lenders add an additional percentage. Banks traditionally provide the lowest APR. However, credit cards traditionally provide the highest—anywhere from 18 percent to 30 percent.

Types of Interest Rates Keep in mind that interest rates differ from company to company and time to time. The following are some different examples:

• Introductory rate—a temporary APR that is very low to attract customers to take out a loan or credit card. Introductory rates usually last for about six to nine months before rising to a higher APR.
• Fixed rate—an APR that does not change, even when the Prime Rate does.
• Variable rate—an APR that includes the Prime Rate plus an additional percentage; therefore, when the Prime Rate changes, so does the variable rate.

In addition to interest rates, there are also a number of additional fees and charges associated with many credit cards, such as:

• Annual fee—a yearly fee just to use the credit card.
• Finance charge—fees that cover various transactions you can make with the credit card, such as cash advances or money transfers, or missed and late payments.

Avoid Fees and Charges You can shop for a card that does not have an annual fee. Also, by always paying off the monthly balance in full, you will avoid paying the high interest charges.

Be Careful Remember that interest rates, while often based on economic formulas, are never absolute. Different credit companies offer different and lower rates in order to get your business.

Remember, to save money, shop around for the best rates, never be afraid to negotiate for a better rate, always stay aware of your interest rates, and always be on the lookout for cards that offer lower rates.

Also, remember that by always paying off the monthly balance in full, you will avoid high interest charges.

Activity Questions

1			Define interest.
2			How is interest calculated?
3			Why does the federal government occasionally raise or lower the Prime Rate?
4			Which type of interest rate is affected by the Prime Rate: a variable rate or a fixed rate? Why?
5			Which type of interest rate is affected by the Prime Rate: a variable rate or a fixed rate? Why?