When you use a credit card, your card company makes money by charging you interest on the amount of money you borrow from them. You can borrow using your card in different ways and often pay different interest rates, based on the way you use your card. Understanding the different interest rates associated with your credit card can help you decide when and how to use it.
Credit Card Transaction Types
The three most common ways you use a credit card include making purchases, transferring a balance and making cash advances. The interest rate you pay on goods and services is known as your purchases interest rate. When you get money from an automated teller machine, or ATM, the interest on this money is called interest on cash advances. If you move a balance from one card to another, this is known as a balance transfer. If you make a balance transfer, purchase something and take a cash advance, you can have three different interest rates and charges on your balance at the same time. Your monthly credit card statement will show you each balance and its interest rate, including the total amount of interest charged on purchases.
Credit Card Interest Rates
Balance transfers often have the lowest interest rate because they include a promotional rate that lasts for a specific period, usually six to 18 months. The rate can be as low as zero percent, rising to a more typical rate once the promotional rate ends. The interest rate on cash advances is usually the highest. Interest rates on purchases usually fall in between the rates for transfers and cash advances.
Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such Smart-Healthy-Living.net, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.