cards are an excellent tool that can be used to help you manage your finances. Basically, they allow you to borrow money to make purchases immediately. As long as you pay your bills in full when they’re due, you won’t pay any . You’re essentially borrowing money for free.
However, if you don’t repay the full amount on time, you could incur some pretty wild rates range between 20% to 22%. That’s incredibly high, which is why you’ll want to use your cards responsibly. . Generally speaking,
rates can fluctuate depending on how you use your card and when you repay your . Knowing how works can help you make smarter financial decisions.
What is credit card interest and why does it matter?
if you don’t pay the entire balance by the date shown on your statement. So even though your bill will show that you only need to pay a minimum amount, you have to pay the total amount to avoid altogether. is the amount of money you’ll pay your
The amount of a charges is typically displayed in the user agreement when you sign up and when you log in to your online banking account.
Every has an -free period. This timeframe lasts at least 21 days, but it can be longer depending on the card. Knowing how works is vital since it’ll determine your overall carrying costs. If you abuse your cards and miss payments, you could quickly fall into , which also impacts your overall .
Types of credit card interest rates
Many people forget that there are different types of rates. How you use your card will determine what the rates are. The following are the most common types of rates:
Purchase interest rate
When looking at your is listed as an —known as the APR. The APR is the most common type of . It’s what you’ll pay on your purchases, and it typically ranges between 20% and 22%. You won’t be charged any as long as you pay your bills in full and on time. statement, you’ll notice that your
Cash advance interest rate
Just about every card allows you to make a . This is where you can use your to withdraw money directly from an ATM. However, most cards charge a few percentage points more than the APR for this service. For example, it’s common to see a that charges 19.99% APR, and 22.99% for advances.
Besides the , the significant difference between rates and the APR is the . With advances, you start accumulating right away. Additionally, purchases such as lottery tickets, gambling sites, and wire transfers are considered advances.
Balance transfer interest rate
When applying for a new , some cards will allow you to what you owe on an existing card to your new one. In addition, the rate you’re offered can often be quite good. For example, your new card might provide you with 0% for 12 months when you .
This is offered as an incentive to sign up. However, a based on the sum you’re transferring may apply. For example, the could be 1%. Although that amount will be added to your , the overall savings you get with the transfer could be worth it.
Penalty interest rate
Although it’s clearly outlined in the . Basically, most companies can increase your if you miss two payments. These two payments don’t need to be consecutive. They could be over the course of a few months or even years. The increase in your can quickly go up by 5% to 10%. agreement, many people fail to read about the penalty
How to calculate credit card interest charges?
To find out how you’re being charged, you need to look at your agreement. However, keep in mind that different have different methods to calculate .
Generally speaking, the following three steps will outline how to calculate .
Step 1: Figure out your daily interest rate
Even though APR stands for annual percentage rate, the i. itself is calculated daily, so you first need to convert your APR to the daily
This is pretty simple math: All you’re doing is taking your and then dividing it by 365—or 366, if it happens to be a leap year. Some banks use a calendar of 360 days to keep things consistent. The difference in over a few days is pretty minimal, so don’t overthink it.
Either way, the number you get is your daily . For example, let’s say your provider uses 365 days to calculate the APR on your that charges 19.99% . That means your daily is .0547%
Step 2: Take a look at your daily balance
This part gets a bit more complicated. First, take a look at your statement and see what your billing period is. How much you’re charged is based on the .
To calculate that rate, you need to factor in any amounts carried over from the previous month. Any payments you’ve made should be subtracted from the balance. Now add up each day’s balance. Once you have the total sum, divide it by the number of days in your billing period. For example, if your balance is $2,000 and your billing period is 28 days, then your is $71.43.
Step 3: Add it all up
Finally, multiply your daily by your . Now, take that number and multiply it by the number of days in your billing cycle. That’s the amount of you owe.
If you’re math-averse, don’t worry: There’s no reason to calculate your manually. Your statement will list the (and total amount) owed. And even if you followed this guide to calculate how much you owe, your calculation may differ slightly from your bill depending on if your compounds daily or monthly.
How to save on credit card interest
While you can’t lower your , there are a few things you can do to lower your costs. Here’s how to save on :
- Pay your bills in full and on time: You won’t need to worry about any if there’s no balance. Just pay off your full bill before the due date.
- Get a between 8%-16%. This is a considerably than the average of 20%-22%. cards are available with an
- If you’re carrying a balance, it can make good financial sense to do a . to a card with a promotional period
- Make more than the minimum payment: If you must carry a balance, try to pay more than the minimum balance. Then, you won’t be charged as much as you’ll still be making a partial payment.
- Use a prepaid – If you’re worried about payments, you could use a prepaid instead. With these cards, you can only spend the funds you’ve already deposited.
The last word
Having a grasp of what is and why it matters is essential, but it’s unlikely to be the only reason you apply for a .
For quicker. who are currently carrying a balance, then the APR has a direct effect on them. Switching to a card with a promotion or a low-interest can help you pay off your
While rates are important, it really depends on your individual situation. For example, someone who always pays their bills in full and on time shouldn’t care about rates since they’ll never be paying them. Instead, they should focus on the welcome bonus, earn rate, and any additional benefits that come with the card.
For who find themselves carrying a balance, the solutions above should help minimize, and eventually, completely pay down their .