How does credit card interest works? A good question that requires answers. According to a Gallup poll in 2014, about half of American credit card cardholders carry balances on their cards.
If you’re one of those millions of users, you must have seen interest charges on your monthly card statement. Do you get to know how these charges are calculated? Getting to know a few facts on credit card interest will enable you to make fast and best financial decisions for your family and yourself.
How Does Credit Card Interest Work?
Credit card purchases are subject to a standard interest rate known as the Annual Percentage Rate, or APR. This number varies from card to card and person to person based on factors like credit card scores. Your Annual Percentage rate is expressed in terms of a year, but credit card companies use it to calculate charges over your monthly statement period. APR measures interest over the time frame of a year.
What is my Credit Card Interest Rate?
Typically, you get to find your credit card APR close to the end of your monthly statement. There is a section of the statement marked “Interested charge Calculation” or a similarly worded section. The statement section entails just how much of your balance would be used when calculating your monthly interest charge.
Usually, you would find the card’s primary APR, expressed as a percentage, easily in the app or on the card issuer’s website. Also, you can find it on your monthly statement or call the phone number found on the back of the card and ask the customer service rep.
How to Calculate
To calculate how much interest rates you are paying on your balance each day, you have to convert your APR to a daily percentage rate. Simply, divide your APR by 365, that is, the number of days in a year. At the end of each day, the credit card company will multiply your current balance by the daily rate to come up with the daily interest charge. The charge is then added to your balance the next day, this is called compounding.
Interest Rate Calculation
For Example, if your credit card has an APR of 15%, it will have a daily rate of 0.041096%. If the cardholder has a balance of $1,000 at the 15% APR standard interest rate. The next day, interest is added and the balance becomes $1,000.41, plus any additional purchases and minus any new credit or payments. This process occurs each day until the end of the monthly statement cycle. Then, at the end of the month, the beginning $1,000 balance becomes $1013 when interest charges are applied at 15% APR.
The Best Time to Pay
The secret about credit card interest rates is that credit card issuers usually give a grace period. If a grace period applies, the credit card company will not charge you interest on purchases if you pay your entire balance at the due date every month.
However, if you fail to pay up all the statement balance, or do not make the payment in time, the cardholders have fortified their grace period, and the interest charges will typically appear on the next monthly statement.
Do Credit Cards Have Interest
You would be charged by credit card companies unless you pay your full balance each month. The interest found on most credit cards is variable and would change from time to time. Some Cards have multiple interest rates, which include one for purchases and another for cash advances.
Important Fact To Take Note
Most credit card variable interest rates can change with the prime rate. The prime rate is an interest rate that is three percentage points above the federal funds rate, which is set by the Federal Reserve Bank. Cardholders should be careful, not to keep more interest charges than they can conveniently pay each month because this interest rate can increase.
Does a Credit card charge Interest Every Month?
Just like I stated previously, Credit cards charge interest on any balances that you do not pay by the due date every month. When you choose to carry a balance from month to month, interest would be accumulated on a daily basis based on what’s called the Daily Periodic Rate (DPR).