Have you ever asked why your credit card rate is so high? With prime rate near a record low, cardholders are often surprised why their credit card interest rates remain so high. While the rate is 99% on a typical credit card, prime rate is just 2.7% (as of July 2016). Although some credit cards offer low introductory rates, a better rate kicks in afterward – often in precisely six months to a year.
Prime Rate vs. Credit Card Interest Rates
Contradicting to popular belief, there’s no relation between prime rate and the credit card interest rates charged on your favorite credit card. In accordance with the Canadian Bankers Association (CBA), the overnight lending rate set by the Bank of Canada represents but one percent of bank funding. Furthermore, it doesn’t influence the pricing of consumer lending or credit cards interest rates.
Four Factors that Influence Credit Card Interest Rates and Fees
The Canadian Bankers Association CBA says there are several factors that influence credit card interest rates and fees, including:
Grace Period: It is An interest-free period from purchase to payment, depending on the card, as long as the balance is paid in full when owing. Usually grace period starts on the last day of your billing period. Most credit card in Canada provide 21 days to pay for your debt in full or the minimum payment required.
If you pay your balance in full every month like most Canadians (unless you pay an annual fee), you’re essentially getting free short-term financing aside from that you are maintaining a good credit score. Issuers only recoup some of the costs when you carry a balance and you’re dinged with costly interest rates on your credit.
No Collateral: Having an access to unsecured credit where no collateral is needed, which makes it a higher risk for the credit card issuer. Credit card company provides a lower credit limit or monthly spending limit with higher interest charges.
Have you ever asked why most mortgages have lower interest rates than unsecured lines of credit? It is because a mortgage has collateral – your house. When you fail to pay with long overdue with your mortgage the bank can foreclose on your home and hopefully resell it to recover the full value of the loan. Once you fail to pay the outstanding balance on your credit card, it’s a lot more difficult for issuers to recover the funds paying at least minimum payment required is recommended. If you default on your credit card payments the issuer may have to write off the loss entirely.
There are significant costs to operating the credit card system including processing an outsized volume of transactions, technology that’s constantly updated to support transactions, preparing and mailing statements, collecting payments and therefore the costs for providing value-added rewards programs.
Although using your credit card for purchase on your credit card is as easy as swiping or tapping your card, there are plenty of complex things that goes behind the scene to approve your purchase. credit card issuers are constantly taking off with new credit cards to assist in reducing fraud. That doesn’t come cheap – someone must pay these security advancements. Unfortunately, it’s the cardholders who fail to repay their balance that are stuck footing a minimum of a part of the bill.
Fraud Prevention: What are the costs to fight fraud and customer reimbursement. When fraud occurs, customers have zero liability. In 2013, financial institutions reimbursed quite $465 million to their Canadian credit card customers, representing the losses these customers suffered as a result of criminal activities.
If you’ve ever been the victim of credit card fraud, you almost certainly breathed an enormous sigh of relief when your credit card issuer removed the fraudulent charges from your account. Although most major credit cards include zero-liability protection, someone should pay the losses. Since the issuers are presumably on the hook at the top of the day, they pass along a number of the value within the variety of higher interest rates.
Most Canadians are Responsible with Credit Cards
Most Canadian do not know how costly it is to carry a balance on their credit card. Most Canadian strive to pay for their credit card balance despite of slow economic and wage growth. According to abacus data survey for 2013, 70% of Canadian pays their balance in full every month. The 30% of those who do not pay their outstanding balance each month, 14% of them pay it through succeeding months and 55% pay a lot more than their minimum balance. In fact, credit card debt represent just 5.5% of total household debt in Canada.
Having a default payment or closing your credit card account may have a big impact to your credit history. Once you have a bad credit and you are planning to have a big purchase in the future, this may lead you to no approval or denial. If you have some questions regarding fixing your credit history talk to a credit specialist. Credit specialist in Toronto may be able to help you like Credit repair now. We can answer your queries and helps you achieve your big purchase in the future.