The Beginner’s Guide to Credit Interest
Credit cards are widely used in today’s world. In fact, in the U.S. alone, almost 78% of the population has a credit card. While some people don’t carry a balance on their card, others do. If you’re one of the people who carry a balance, you’ve likely seen the interest charges on your monthly statement. But how much do you know about credit card interest?
There are some details you’ll want to know about interest rates, to include how they’re calculated along with the importance of knowing how to compare the APR of credit cards.
What is Interest Rate?
No matter if it’s a credit card, a car loan, or a mortgage when you borrow money from a lender, they charge what’s known as interest. Interest is what puts money back into a lender’s pocket.
Whenever you make a purchase on your credit card, you’re subject to a standard interest rate, which is known as the APR. APR, also known as the annual percentage rate, varies between cards and people. There are many factors that impact your interest rate including:
- Credit score
- Credit history
- Type of credit card
- Market rates
When looking at the terms and conditions of a credit card and its associated APR, you’ll likely see the figure expressed in terms of a year. Credit card companies use this number to calculate interest charges on a monthly period.
How Interest Rate is Calculated
Want to find out just how much interest you’re paying on your balance each day? Using a little math you can convert your APR to a daily percentage rate that gives you a clearer understanding of how much of your money is going towards interest.
To determine your daily percentage rate, divide your APR by 365, which is the number of days in a year. This is the number that the card issuer users. Daily interest is determined by multiplying your daily percentage rate with the total balance on the card.
Let’s say you have an APR of 13%. This means that your daily rate would be 0.03561%. If you have a balance of $2,000, you can expect an interest change of $0.35 each day. This daily charge occurs until the end of the monthly statement cycle. At the end of the month, your new balance would be $2,010.5.
To get the best bang for your buck, you obviously want to pay off your balance each month. But if you carry a monthly balance, you want to compare credit cards by finding the lowest interest rate. This way less money will go towards interest each month.
When is the Best Time to Pay Your Credit Card
All credit cards have payment due dates, but one of the greatest things about having a credit card is that credit cards often have a grace period. If you have a grace period, the credit card issuer doesn’t charge you interest on any purchases if your entire balance is paid by the payment due date. By paying off your entire balance each month by the payment due date, you won’t have to worry about interest fees. This can save you hundreds of dollars each year!
However, if you don’t pay off the entire balance or if you make a late payment, you forfeit the grace period and you are charged interest. These interest fees typically appear on the next statement.
Be sure to carefully read the terms and conditions associated with your credit card so that you understand how long your grace period is. It’s also important to know your payment due date and to have a detailed understanding of what may violate the terms and conditions.
Other Credit Interest Facts
As with anything that deals with finances, there are some other credit card interest details that you’ll want to know about. First, know that all credit cards have not only a purchase APR but other types of APR as well. One of the most common APR aside from purchase APR is promotional APR. This is an APR that’s available for a limited time. Promotional APRs are typically associated with 0% interest credit cards.
Another APR you want to know about cash advance APR. Similarly to a debit card, you can take out a cash advance on your credit card. Just be aware that most lenders charge a much higher APR and there’s often no grace period.
Last, know that some credit cards have variable APRs. This means that your APR is likely to change over time, especially as the Prime Rate changes. Make sure you know the kind of APR that’s associated with a credit card before applying.
If you have a credit card, or if you borrow money from a lender in some other way, it’s important to understand how credit card interest works. By knowing how and when you’ll be charged interest on your purchases, you can take the necessary actions to avoid paying interest at all!