Understanding Credit Card and Loan Interest Rates

An interest rate is the rate charged or paid for using money. You are charged an interest rate when you borrow money and paid an interest rate when you loan money (placing it in a savings or investment account is like a loan to the bank).

In the economy, there are lots of different interest rates. For example, the federal discount rate is the interest rate charged by the discount window (the Federal Reserve Bank's lending facility) to its member banks.

The federal funds rate is the interest rate that the most creditworthy banks lend money to each other overnight.

Consumer borrowers are mostly familiar with credit card and loan interest rates, which directly influence the cost of borrowing. Lower interest rates mean you'll pay a lower cost, while higher interest rates mean a higher cost. You'll see the cost reflected in your finance charges. By law, lenders are required to disclose interest rates - along with other loan costs - to you before you apply for a credit card or loan.

Your interest rate is typically influenced by your credit score (and market interest rates). Low credit scores lead to high interest rates and vise versa. When borrowing money, your goal is to pay the lowest interest rate possible.

Interest rates are typically expressed as an annual percentage rate - the yearly cost (or benefit) of borrowing (or loaning) money. Because interest is paid monthly or on some other period, you might see your interest rate expressed as a periodic rate.