Credit cards have become a popular tool of borrowing money. There are a number of banks and credit card companies that issue these cards for the customers. These organizations earn revenue through the credit card interest. The interest rates of these credit cards vary for several reasons.
Credit cards provide easy credit option to the cardholders. There are different banks and other financial organizations that provide these options to the clients. The cardholders are provided with the option to spend a definite amount for different reasons and the credit card issuing company then pays the amount for the cardholders. Once the company has made the payments, the cardholders start paying back the money to the card issuers in installments. A definite amount of credit card interest rate is charged on this amount.
The credit cards are also used to borrow cash. A definite amount of interest is applicable to this borrowed amount. The credit card interest is the main source income for the credit card companies.
The interest rates charged by the credit card companies depend on a number of factors like the credit history of the customer, the amount borrowed as well as the term period of the loan, present financial status and financial liabilities of the customer and so on. The credit card companies face huge amount of financial risk by providing these financial services. This is because the loans that they offer are not always secured and the cardholders very often default to repay. The credit card interest rates are also used as a financial risk-hedging instrument by the credit card companies.
There are a number of credit cards that offer only secured loan and generally the real estates are preferred as collateral. The interest rates charged by these companies or banks are very low. Apart from these, other cards charge 10%-20% as interest rates. The credit card interest rates are quite high in those countries where the rate of inflation is high.
The interest rates are calculated through a definite process. The interest rates in US are calculated according to the compounded monthly nominal annual percentage rate although the effective annual rate is more direct approach to decide the interest rate for a full year. Generally, the factor EAR=(1+APR/n)^n-1 is followed to convert annual percentage rate to effective annual rate.