Question

BestBank's Visa credit card discloses an A.P.R. of "Prime Rate + 5.74% to Prime Rate + 22.74%." If the Prime Rate increases from 3.25% to 4.25%, what impact would this have on A.P.Rs for cardholders?
a. No change since credit card A.P.Rs don't change as long as your account is open
b. Increase in A.P.R by 1%
c. Decrease in A.P.R. by 1%
d. Increase in A.P.R. by 22.74%

Answer 1

The prime rate is the base rate for any financial transaction. The prime rate is considered for each type of lending instruments by the bank. bank add a margin % over the prime rate and offer loan/instrument at the increased rate.

In the given case, the BestBank's Visa credit card discloses an A.P.R. of "Prime Rate + 5.74% to Prime Rate + 22.74%, which means the A.P.R is calculated on the basis of Prime rate and any change in prime rate will directly affect the A.P.R.

The Prime Rate has increased from 3.25% to 4.25%, it means the increase of 1%. Hence the A.P.R. Shall also increase by 1%.

Hence the correct answer is:

b. Increase in A.P.R by 1%