Issuers of credit cards derive revenue from transactions involving these cards through charging interests applied to the borrowed amounts, thus credit card funds are a form of a loan advancement based on the client’s stipulated account limits.
Banks enjoy viability as regards this type of a service in that they take precautionary measures aimed at ensuring repayments are done. And this is where credit reports come in, a client’s credit history is assessed as to determine the levels of default risk.
Interest rates vary with some countries charging far much higher rates than others, while some credit card accounts enjoy lower interest rates depending on a number of factors, which include loan security or collateral. In the United States they range between 7 and 36%, while other countries such as Brazil are renowned for charging much higher rates. It is also common practice for clients with steady incomes and assets to enjoy lower interest rates.
The nominal annual percentage rate (APR) is usually quoted as the standard daily and/or monthly rate, but is typically dissimilar from the effective annual rate (EAR), and the conversion factor between the two is APR to EAR is EAR ((1+APR/n)^n)-1.
And for the card issuers to determine a favorable rate of return against the card holder’s credit scores, they add the desired rate to the loss rate, and in turn establish the applicable interest rate. A financial institution takes into account the borrower’s current monetary obligations such as loans, and finds the ratio by calculating against the net income.
Interest charges are not the only revenue channels for credit card issuers, but rather they also charge other fees pertaining to such accounts, and these can be penalty fees or transaction fees. The disclosure and calculation of interest rates is a matter of great importance for government, and hence they pay attention to this financial aspect through enacting relevant laws.
According to the law, card issuers have the right to raise their interest rates for as long as this is done within the predefined limits, and must inform card-holders in writing of any moves to that effect. It is the prerogative of the card-holder to accept any such changes or not, and in the event that the borrower is uncomfortable with the new rates he/she can cancel the account and will be expected to pay off the outstanding amount in tandem. By taking into account the average daily balance, the interest rate charge is accurately calculated at the closing date of the billing cycle.