Credit Card Guide

What is Credit Card Default Interest Rate?

22 February 2011 by CreditCardsCo™

While card issuers provide a card holder with the immediate funds to purchase an item they obviously have to make some money themselves in order to continue to provide the service, as with any business.

They do this by charging an annual interest rate on the amount of money owed to them by the card holder. If a card holder is late making payments or defaults in any way the bank will resort to using the default interest rate.

The bank that supplies the credit card will pay the payee and then over time they will charge the card holder interest on any remaining money owed to them. It works in a very similar way to a loan and its repayment and interest. When a card holder uses a credit card to pay for purchases they are effectively borrowing money from the card issuer which then has to be paid back.

What Is a Default Interest Rate?

A default interest rate is way a bank or card issuer will penalize card holders for late or non-payment of their account. If the card user violates the set terms and conditions of the card and its issuer then the default interest rate will come into effect.

Many banks and card issuers have a default interest rate which is charged to a card holder in the event of either two late payments, or overdue amounts past the due date of payment. It can also be charged if a payment is returned due to insufficient funds for example or if the card is used in such a way that it takes the amount owed over the credit limit, even if the limit is exceeded due to the banks own charges and fees. In certain cases default interest rates are charged because of a drop in the card holders credit rating or because they may have defaulted with a different lender.

Default interest rates are typically a lot higher than normal APR (annual percentage rates) rates, and can have a catastrophic effect on the users' financial situation and future credit scoring or rating. It is always advisable for any card holder to keep track of all balances on checking accounts from which payments to the credit card companies are made, and credit card statements that show the amount of interest being charged.

Is a Default Interest Rate the Only Interest Rate?

No. All credit cards have three levels of interest rate other than the default rate; purchase rate, cash advance rate, and the balance transfer rate. All rates have a specific role to play and provide the card issuer with certain guarantees that monies owing on the credit card will be repaid by the card holder. Interest rates in all three categories are subject to change at any time, and if there is an applicable default rate clause in the terms and conditions of the credit card any or all of the interest rates can be triggered to the default rate.

How to Avoid Default Interest Rate Charges

The easiest way to avoid any default interest rate charges is to ensure that payments are made on time and in full. If paying the balance in full is not an option, the maximum amount possible should be paid as soon as possible. It makes more sense to use savings to pay off a credit card that is ultimately going to end up costing you more money than you can save due to default interest rates.

Do not avoid or ignore credit card bills. This will just add to the problem. If it looks as though there is going to be difficulty in paying a bill, contact the issuer and discuss the situation and possible options.

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