Credit card interest is the primary way in which credit card issuers generate revenue. The card issuer is a bank or credit union that gives the consumer (cardholder) card or account number that can be used with various payees to make payments and borrow money from the bank simultaneously. The bank pays the payee and then charges the cardholder's interest as long as the money is still borrowed. The bank suffers a loss when the cardholder does not repay the loan as agreed. As a result, optimal interest calculations based on whatever information they have about cardholder credit risk are key to the profitability of card issuers. Before determining what interest rates are offered, banks usually check the national, and international (if any) financial statements, credit bureaus to identify the credit history of cardholder applicants with other banks and conduct detailed interviews and financial documentation of the applicant.
Video Credit card interest
Interest rate
Interest rates vary widely. Some credit card loans are secured by real estate, and can be as low as 6 to 12% in the US (2005). A typical credit card has an interest rate of between 7 and 36% in the US, depending on the method of bank risk evaluation and the borrower's credit history. Brazil has a much higher interest rate, about 50% above most developing countries, which averages around 200% ( Economist , May 2006). Visas or MasterCards issued by Bank of Brazil to new account holders may have annual interest as high as 240% even though inflation seems to have gone up per year ( Economist , May 2006). Banco do Brasil offers new account holders for Visa and MasterCard credit accounts for 192% annual interest, with lower interest rates for people with reliable revenues and assets (July 2005). These high-interest accounts usually offer very low credit lines (US $ 40 to $ 400). They also often offer a no-interest grace period until the due date, which makes them more popular for use as liquidity accounts, meaning that the majority of consumers use them only for ease of making purchases in monthly budgets, and then (usually) paying them in full each month. Until August 2016, Brazil's tariffs could reach as high as 450% per year.
Maps Credit card interest
Interest rate calculation
Most US credit cards are quoted in annual annual percentage rate (APR) plus daily, or sometimes (and especially before) monthly, which in both cases is not equal to the effective annual rate (EAR). Although "yearly" in APR, it is not necessarily a direct reference to the interest rate paid on a stable balance for one year.
Referenced lebih langsung untuk tingkat bunga satu tahun adalah EAR. Factor to speak umum untuk APR that EAR adalah , di mana merepresentasikan jumlah will periodically receive APR per period EAR.
Untuk kartu kredit umum yang dikutip per 12,99% APR majemuk setiap hari, EAR satu tahun adalah , atau 13.87%; dan jika digabungkan setiap bulan, EAR satu tahun adalah atau 13,79%. Each base, EAR satu tahun untuk peracikan bulanan selalu kurang dari EAR untuk peracikan setiap hari. Namun, hubungan keduanya dalam periode penagihan individual bergantung per APR dan jumlah hari dalam periode penagihan.
Misalnya, diberikan 12 periode penagihan setahun, 365 hari, give APR to grow 12,99%, jika periode penagihan adalah 28 hari, maka tarif yang dikenakan oleh gabungan bulanan lebih besar daripada yang dibebankan oleh penggabungan harian ( lebih besar dari ). Tetapi untuk masa penagihan 31 hari, pesanan dibalik ( kurang dari ).
In general, credit cards available to middle class cardholders that range in the credit limit from $ 1,000 to $ 30,000 calculate the financial costs by exactly the same method as compounded interest plus everyday, even though the interest is not posted to the account until the end of the billing cycle. US APR of 29.99% brings an effective annual rate of 34.96% for daily compound and 34.48% for monthly compounding, given a year with 12 billing periods and 365 days.
Table 1 below, provided by Prosper (2005), shows data from Experian, one of the 3 major US and UK credit bureaus (along with Equifax in the UK and TransUnion in the US and internationally). (The data actually comes from installment loans [closed loans], but can also be used as a fair estimate for credit card loans [open loans]). This table shows the level of loss of the borrower with various credit scores. To get the desired rate of return, the lender will add the desired level to the level of loss to determine the interest rate. Although individual borrowers are different, lenders predict that, as aggregates, borrowers will tend to exhibit similar payment behavior that others with similar credit scores have indicated in the past. The Bank then competes in details by making an analysis of how to use such data along with other data they collect from apps and history with cardholders, to determine the interest rate that will attract borrowers while remaining competitive with other banks and still guarantee a profit. Debt to income ratio (DTI) is another important factor for determining interest rates. The bank calculates it by adding the minimum repayment obligations of the borrower's loan, and dividing by the cardholder's income. If it is more than a set point (like 20% in this example) then the loan to the applicant is considered a higher risk than the one provided by this table. This level of loss includes the revenue that the lender receives from the payment in billing, either from debt collection after a default or from the sale of the loan to a third party for further collection effort, at a fraction of the amount owed.
To use the chart to make a loan, determine the expected expected return on investment (X) and add it to the expected loss level of the chart. The amount is an estimate of the interest rate to be contracted with the borrower to achieve the expected rate of return.
The Bank makes many other costs that are intertwined with interest costs in a complex way (because they benefit from all combinations), including transaction fees paid by merchants and cardholders, and penalty fees, such as to borrow against a set credit limit, or to fail to make a minimum payment on time.
Banks vary greatly in the proportion of credit card account revenues coming from interest (depending on their marketing mix). In typical UK card issuers, between 80% and 90% of cardholder income is generated from interest charges. Another 10% consists of the default cost.
Legal
Riba
Many countries limit the amount of usable interest (often called usury law). Most countries strictly regulate the manner in which the interest rate is agreed, calculated, and disclosed. Some countries (especially with Muslim influence) prohibit interest at all (and other methods are used, such as the interest of ownership taken by the bank in the business profits of the cardholder based on the purchase amount).
United States
Credit Cards Act of 2009
This law covers several aspects of credit card contracts, including the following:
- Over-the-limit cost limit for cases in which the consumer has granted permission.
- Limit interest rate increase on your previous balance to cases where your account has been more than 60 days late.
- The general interest rate increases to 45 days after written notice is given, allowing consumers to leave.
- Requires additional payments to apply to the highest interest-rate sub-balances.
Truth in Lending Act
In the United States, there are four commonly accepted methods of charging, listed below, the "Flower Filling Method". This is detailed in the Z rule of Truth in the Loan Disbursement Act. There is a legal obligation to US publishers that the method of interest collection is disclosed and sufficiently transparent to be fair. This is usually done in the Schumer box, which lists the rates and conditions in writing to the applicant of the cardholder in the standard format. Rule Z details four main methods of calculating interest. For purposes of comparison between tariffs, the "expected rate" is the APR applied to the average daily balance for a year, or in other words, interest charged on the actual balance lent by the bank at the close of each business day.
It says, there are not only four ways that are specified to impose interest, which is specified in Rule Z. The US publisher may charge according to the reasonable method approved by the cardholder. The four (or arguably six) "safe-harbors" way of describing and charging interest are described in Rule Z. If a publisher withdraws interest in any of these ways then there is a brief explanation of the method in Rule Z that can be used.. If the lender uses the description, and charges interest in that way, then their disclosure is considered to be quite transparent and fair. If not, then they should give an explanation of the method used. Because of the definition of safe-harbor, US lenders tend to be interested in these charging methods and explain how interest is charged, because (i) it is easy and (ii) legal compliance is guaranteed. Arguably, this approach also provides flexibility for publishers, enhances the profile of the ways in which interest is charged, and therefore increases the scope for product differentiation on what, after all, the main product features.
Pre-payment fine
The clause calls for a penalty to pay more than regular contract payments that were once common in other types of loans, installment loans, and they are very concerned to the government that arranges credit card loans. Today, in many cases due to strict laws, most card issuers do not charge a pre-payment penalty at all (except those naturally derived from the interest calculation method - see section below). That means the cardholder can "cancel" the loan at any time by paying it, and bears interest no more than it calculates at the time the money is borrowed.
Cancel a loan
Cardholders are often shocked in situations where banks cancel or change their loan terms. Most card issuers are allowed to raise interest rates - in accordance with legal guidelines - anytime. Usually they should give notice, for example 30 or 60 days, in writing. If the cardholder does not agree with the new rate or terms, then it is expected that the account will be paid off. It can be difficult for cardholders with large loans that are expected to make payments over the years. The bank may also cancel the loan and request that all amounts be refunded immediately for any default on any contract, which can be as simple as late payment or even default on a loan to another bank (called "Universal default") if the contract declares it. In some cases, the borrower may cancel the account within the allowed time without paying off the account. As long as the borrower does not make new charges in the account, the borrower has not "approved" the new terms, and can pay off the account under the old provisions.
Average daily balance
The daily balance amount divided by the number of days covered in the cycle to provide an average balance for that period. This amount is multiplied by a constant factor to provide interest costs. The resulting interest is the same as if the interest is charged at the closing every day, except that it is only a compound (to be added to the principal) once per month. This is the simplest of the four methods in the sense that it produces an interest rate that is close to if it is not exactly the same as the expected level.
Adjusted balance
The balance at the end of the billing cycle is multiplied by the factor to provide interest costs. This can result in an actual interest rate lower or higher than expected, since it does not take into account the average daily balance, that is, the time value of money actually lent by the bank. However, he calculates the money left for several months.
Previous balance
The reverse occurs: the balance at the beginning of the previous billing cycle multiplied by the interest factor to get the cost. Like the Customized Balance method, this method can generate interest rates higher or lower than expected, but the part of the balance that carries more than two full cycles is charged at the expected rate.
The average daily balance of two cycles
The daily balance amount of the previous two cycles is used, but interest is charged to that amount only during the current cycle. This may result in actual interest charges that apply advertised rates to an amount that does not represent the actual amount of money borrowed from time to time, much different from the expected interest cost. Interest charged on actual money borrowed from time to time may change radically from month to month (rather than the APR remains stable). For example, cardholders with an average daily balance for the June, July, and August cycles of $ 100, 1000, 100, will have interest calculated at 550 for July, which is only 55% of the expected interest at 1000, and will has interest calculated at 550 again in August, which is 550% higher than the expected interest on money actually borrowed during that month, ie 100.
However, when analyzed, the interest on a fixed balance borrowed over the entire time period ($ 100 in this case) is actually close to the expected interest rate, just like any other method, so that variability is only on balance that varies month-by-month. Therefore, the key to keeping interest rates stable and approaching "expected numbers" (as given by the average daily balance method) is to keep the same close balance every month. Strategic customers who have this type of account pay for it every month, or make the most of the costs towards the end of the cycle and payments at the beginning of the cycle to avoid paying too much interest above the expected interest due to the interest rate; while business cardholders have a more sophisticated way of analyzing and using this type of account for peak cash flow needs, and are willing to pay "extra" interest in doing business better.
Much confusion is caused by and many mis-informations are given about this method of interest calculation. Due to its complexity for consumers, advisers from Motley Fool (2005) to Credit Advisors (2005) advise consumers to be cautious about this method (unless they can analyze it and achieve the true value of it). Despite the confusion of variable interest rates, banks using this method do have a reason; that's the cost of banks in the cost of strategic opportunity to vary the number of loans from month to month, because they have to adjust the assets to find borrowed money when suddenly borrow, and find something to do with money when it is paid back. In this case, the average daily balance of two cycles can be equated to the cost of electricity for industrial clients, where costs are based on peak usage rather than actual use. And, in fact, this charging method is often used for business cardholders as mentioned above. These accounts often have credit lines that are much higher than the usual consumer accounts (perhaps tens or hundreds of thousands, not just thousands).
Daily accrual
Daily accrual methods are commonly used in the UK. Annual tariff is divided by 365 to provide daily rates. Everyday, the account balance is multiplied by this rate, and at the end of the cycle, the total interest is charged to the account. The effect of this method is theoretically mathematically the same for a year as the average daily balance method, since interest is compounded every month, but is calculated on daily balances. Although a detailed analysis can be performed which shows that effective interest can be slightly lower or higher each month than with the average daily balance method, depending on the detailed calculation procedures used and the number of days in each month, the effect on the whole year provides only trivial opportunities for arbitration.
Methods and marketing
As a result, differences in methods largely acting on balance fluctuate from the latest cycles (and almost the same for balances carried over from cycle to cycle.Banks and consumers are aware of transaction costs, and banks actually receive incomes in the form of payments per transaction from traders , in addition to getting a new loan, which is more business for the bank.Therefore, the interest charged to the latest cycle is interrelated with other cardholders and bank's income and benefits, such as transaction fees, bank-fee transactions, marketing costs for get every new loan (which is like selling for a bank) and marketing costs to the overall cardholder's perception, which can increase market share.Therefore, the rates charged on the latest cycle are mostly a matter of marketing preference based on the cardholder's perception, not a problem maximize tariffs.
Bank fee arbitrage and limit
In general, the difference between methods represents the level of precision beyond the expected interest cost. Accuracy is important because any detectable differences from the expected level can theoretically be exploited (through arbitration) by the cardholder (who has control over when to fill and when to pay), to the possible loss of bank profitability. However, in essence, the difference between trivial methods except in terms of cardholder and marketing perceptions, due to transaction costs, transaction revenues, down payment fees, and credit limits. While cardholders can definitely affect their overall costs by managing their daily balances (for example, by buying or paying early or late on the month depending on the method of calculation), their chances of scaling these arbitrages to make huge amounts of money are severely limited. For example, to charge a maximum on a card, to take maximum advantage of any difference in the calculation method, the cardholder must actually buy something of that value at the right time, and do so only to take advantage of the small mathematical differences. of the expected level can be very troublesome. It increases the cost for each transaction that obscures whatever benefits can be obtained. The credit limit limits how much can be billed, and so how much profit can be taken (trivial amount), and the cash withdrawal fee is charged by the bank partially to limit the amount of free movement that can be achieved. (At no cost, cardholders can make every daily balance that benefits them through a series of down payments and cash payments).
Cash rate
Most banks charge separate interest rates, higher interest rates, and down payment fees (ranging from 1 to 5% of cash taken) on cash or cash transactions (called "quasi-cash" by many banks). This transaction is usually a transaction that the bank does not accept transaction fees from the payee, such as cash from a bank or ATM, a casino chip, and some payments to the government (and any transactions seen in bank policies such as cash exchanges), such as payments to some invoice). As a result, the interest rate charged on purchases is subsidized by other profits to the bank.
Default rate
Many US banks since 2000 and 2009 have a contractual failure rate (in the US, 2005, ranging from 10% to 36%), which is usually much higher than the typical APR. Rates apply automatically if one of the conditions listed occurs, which may include the following: one or two late payments, any amount exceeded after the due date or one more cycle, refunded payments (such as NSF checks), any top filling the credit limit (sometimes including the bank's own expense), and - in some cases - a credit rating reduction or default with other lenders, at the discretion of the bank. As a result, the cardholder agrees to pay the default rate on the outstanding balance unless all the events listed can be guaranteed not to happen. A single late payment, or even an unreconciled error on any account, can cost hundreds or thousands of dollars over the life of the loan. This high effective cost creates a huge incentive for cardholders to keep track of all credit cards and checking account balances (from where credit card payments are made) and to keep margins wide (extra money or money available). However, the lack of a proven "account balance of ownership" in most credit card designs and checking accounts (studied between 1990 and 2005) makes this "penalty fee" a complex issue. New US laws enacted in 2009 restrict the use of default levels by allowing increased rates on purchases made to accounts that are more than 60 days late.
Variable rate
Many credit card issuers provide rates based on economic indicators published by respected journals. For example, most US banks offer credit cards based on U.S. prime rates. lowest published in the Wall Street Journal on the previous business day until the beginning of the calendar month. For example, the rate given as 9.99% plus the prime rate would be 16.99% when the prime rate is 7.00% (as late as 2005). These numbers usually also have the minimum and maximum contracts to protect consumers (or banks, as they are) from the wild fluctuations of the main interest rate. Although these accounts are more difficult to budget, theoretically they can be slightly cheaper because banks do not have to accept the risk of market fluctuations (because prime rates follow the inflation rate, which affects the profitability of loans). Fixed rates can be better for consumers who have a fixed income or need control over their payment budgets. These rates may vary depending on the policies of different organizations.
Grace period
Many banks make exceptions to their normal method of calculating interest, in which no interest is charged on the balance of the final report paid on the due date. Banks have various rules. In some cases, accounts must be paid off for two consecutive months to get a discount. If the required amount is not paid, then the normal interest rate calculation method is still used. This allows cardholders to use a credit card for the convenience of a payment method (to have one invoice paid with one check per month rather than multiple cash or separate checks), which allows them to save money reinvested until it has to be moved to pay the balance, to keep them afloat on the money lent out during each month. Banks, in essence, are marketing the convenience of payment methods (to receive fees and possible new loan income, when cardholders do not pay), as well as the loan itself.
Campaign interest rate
Many banks offer very low interest rates, often 0%, for certain cycles of statements on certain sub-balances ranging from entire balances to purchases or balance transfers (used to pay off other accounts), or just to buy certain items in a store owned or contracted by the lender. Such "no interest" credit cards allow participating retailers to generate more sales by encouraging consumers to make more purchases on credit. In addition, the bank gets an opportunity to increase revenue by having more money lent, and possibly additional marketing transaction payments, either from the payee or sales side of the business, to contribute to sales (in some cases, as much as interest payments, is charged to the payee , not the cardholder).
This offer is often complicated, requiring the cardholder to work to understand the terms of the offer, and possibly to settle the sub-balances on a certain date or to have retro-active interest, or to pay a certain amount per month for the minimum due (minimum payment) interest ") to pay sub-balances. The methods for communicating sub-balances and rules on statements vary greatly and are usually incompatible with any standard. For example, sub-balances may not always be reconciled with the bank (due to lack of debit and credit reports on those balances), and even the term "cycle" (for number of cycles) is not often defined in writing by the bank. The Bank also allocates payments automatically to sub-balances in various ways that are often unclear. For example, they can contractually pay off the promotional balance before the higher-interest balance (causing higher interest to be charged until the account is fully paid). These methods, in addition to saving the cardholder money exceed the expected interest rate, serve to obscure the actual rate charged by the bank. For example, consumers may think they are paying zero percent, while the actual calculated amount on their daily balance is much higher.
Beginning February 22, 2010, "every level of interest promotion must last no less than six months". Additionally, when the "promotion" rate expires, the normal balance transfer rate will apply and a significant increase in interest costs may increase and may be greater than before making a balance transfer.
Rewards Program
The term "gift program" is the term used by the card issuer to refer to the offer (first used by Discover Card in 1985) to share transaction fees with cardholders through various games and bonus programs. Card holders usually receive one "point", "mile" or real cents (1% of transactions) for each dollar spent on the card, and more points to buy from certain types of merchants or cooperating merchants, and then can pay the loan , or trade points for airlines, merchandise catalogs, low interest rates, gift cards, or cash. The points can also be exchanged, sometimes, between programs of cooperation from different banks, making it more and more like a currency. These programs represent enormous value that is not entirely regarded as a series of currencies. This combined "currency" has accumulated to the point where they hold more value worldwide than the US dollar (paper), and is the subject of a corporate liquidation dispute and a divorce settlement ( Economist , 2005). They are criticized for being overwhelmingly inflationary, and are subject to the wishes of card issuers (raising prices once points are obtained). Many card holders use cards for points, but then forget or refuse to use points. While opening new avenues for marketing and competition, award programs are criticized in terms of being able to compare interest rates by making it impossible for consumers to compare one competitive interest bid with another through standard means such as under US Truth in Lending Act, due to the extra value that offered by bonus programs, along with other terms, fees, and benefits made by other marketing gimmicks as cited in this article.
References
Source of the article : Wikipedia
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