Reason Why Credit Card Interest Charges are High
You can get a fixed-rate mortgage for five years, which is under 3% and protected line of credit for as low as 3%. As you contemplate in these figures, you might be wondering why you’re accumulating sky-high interest rates on your credit cards. With a usual interest charge amounting to18%, credit cards are said to be the most extravagant types of debt that come after to your payday loans.
Hence, you must shun holding any outstanding balance on your credit card. Moreover, holding a credit card balance entails several years for you to service your debt and can cost you thousands of dollars in interest payments. Even though credit cards are said to be a sort of consumer financing, the sky-high interest charge, and the prime rate of your credit card is relatively unjustifiable.
The Overnight Lending Rate and Credit Card Interest Rates
Overnight lending rate and credit card interest rates are a bit related to each other. The Bank of Canada set an overnight lending rate that represents lesser than 1% of bank funding, as per CBA or Canadian Bankers Association. In fact, the CBA reveals that there are influences on the value of consumer lending as well as credit card interest charges.
Factors that Affects Credit Card Interest Rates
If Canada’s bank doesn’t affect credit card interest rates, you might be wondering what triggers the interest rates of your credit card. As per the CBA, various factors impact credit card interest rates and fees. These factors are as follows:
This is the period that is free from interest from the time of purchase to payment. This may depend on the agreement stipulated on your card for as long as you paid your balance in full. By putting payments on your outstanding balance every month, you are receiving a short financing term for your institution. If you fail to pay your outstanding balance, a card issuer may recover the loses through high-interest charges.
Gaining unsecured credit, which means without the presence of collateral leads to a higher risk in the part of the credit card issuer. The interest rate that you incur on a consumer product yields many risks for the lenders. Unlike in mortgage, your interest rates are lower considering that your home serves as your collateral in case you fail to comply in repaying such loans. On the other hand, your credit card is not protected with any collateral, making the risk of default to be likely higher.
There are important expenses in enforcing credit card systems which involve a large volume of transactions in the process. As technology constantly modernized to back up certain transactions, arranging and posting statements, negotiating for payments and the charges for rendering value-added rewards promos.
Though it’s free when you make certain purchases on your credit card, retailers will likely foot some of the bills unless when you’re paying an annual fee. Retailers are charged for a transaction fee on every purchase you make. Besides, the modernized new security such as Chip-and-PIN technology will secure each transaction. Moreover, if the cardholders won’t pay the full balance it will aid in sharing the cost.
Some costs are associated with preventing fraud and initiating customer reimbursement. In the occurrence of fraud, customers hold no liability. A financial institution compensates more than $465 million to its credit card customers in Canada. This represents the losses of these customers, which is a result of criminal activities.
Despite the security advancements, fraud is still a budding problem that credit card issuers are dealing with. Over 693,000 accounts were said to be the victim of fraud, with average losses amounting to $671 per account, as per the CBA. Although it is anticipated or covered by zero-liability security, it’s the delinquent accounts that ease pay some of the accumulated losses. Now, that you have wide awareness and understanding about your credit card interest rates, it would be easier to shun holding a balance and acquiring sky-high interest rates on your credit card.
CONSUMER PROPOSAL EXAMPLE
Example Unsecured Debts
|2||Credit card 1||$6,812|
Your Monthly Repayments Would Be
a Consumer proposal $748
(total contractual repayments)
a Consumer proposal $295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances.