Understanding Nominal vs. Annual Interest Rates

Recently, many people noticed the nominal interest rate on their credit card statements. This rate is usually lower than the annual percentage rate (APR) because certain fees must be disclosed.

The nominal interest rate is the basic rate on your card. The APR can be higher due to extra fees, such as foreign transaction fees, membership fees, or statement fees. Balance transfer fees can also raise your APR significantly. Always calculate these fees before considering a transfer.

How Nominal Interest Rate Works

The nominal rate equals your periodic interest rate multiplied by the number of periods in a year. For example, an 18% annual rate equals 1.5% per month (18% ÷ 12 months).

If a fee is included in the calculation, your APR increases. Lenders must show this higher APR to reflect the true cost of borrowing.

Legal Requirements for Disclosure

The Truth in Lending Act requires lenders to clearly disclose interest rates. Regulation Z, set by the Federal Reserve Board, provides the standard method for calculating the APR. This ensures that all lenders show interest rates consistently and transparently.