(Newswire.net — November 11, 2020) — Credit cards are tricky, and so are their interest rates. It takes a lot of head banging to wrap your mind around the information. We’re here to try and break it down into everything you should know about credit card interest rates. How they work, different types of interest calculations, etc. This should give you an overview of what to expect.
What if I don’t gave a credit card?
If you’ve just finished your education, or for whatever reason you don’t own a credit card, you should definitely start building your credit score. It is going to be helpful if you want to take a loan in future. Credit cards are a good way to start building your credit score. Even if you don’t plan on taking a loan, credit cards have many benefits. Now, building a credit score is again, from ground up, very tricky. There are some online services such as Velocifin that can help you strategically build a strong credit score.
How is interest calculated for credit cards?
Interests are calculated based on something called APR. It is the short for Annual Percentage Rate. APR basically means the amount of money you pay for a credit card including the fees, calculated for a whole year in form of percentage. In a simple example, if your credit card’s APR is 20% and you used $1000 from your credit card over an year, you’ll be paying a total of $200 in form of interest, fees, etc. during that year. That’s when putting it in simplest terms and isn’t completely accurate. To understand what charges you’ll be paying, it’s best to read the credit card disclosure for all the APRs being applied. The current interest rate that is being applied on your balance is also showed in your credit card billing statement alongside the balance.
Most credit cards give you a certain period of time to pay your bill. During that, you can pay the balance in full and you don’t have to pay any interest. This is known as a grace period. After that, if any balance is left to be paid, they charge you interest calculated in form of finance charge. These finance charge are calculated based on different factors. To know more about the finance charges of your credit card, you can check your credit card disclosure as mostly it will be mentioned there. If not, you can ask your card provider for more information regarding all the charges. Some credit card providers calculated this charge based on daily credit card balance (average). Some calculate it by considering your balance at the beginning or end of a billing cycle.
When do credit card providers charge interest?
Here are some instances where interest is charged on your credit card billing.
- When you don’t pay the outstanding amount before due date.
- When you only pay the minimum due amount for that month.
- When you pay less than the minimum amount due.
- When you carry forward an amount due for current month to the coming month.
These are some cases where you’ll be charged interest. If you clear all your dues on or before due date, you won’t have to pay any extra charges.
How interest can pile up on your credit card debt?
To understand how interest rate affect your debt, here’s an example. Let’s say you spent an amount of $1000 from your credit card which charges you an APR of 15%. If you pay only a minimum amount of $25 each month, your interest will add up to around $400, and it will take you about 56 months to pay off the complete amount due to compound interest. That’s why, the best way to minimize the interest that you have to pay is to clear of your credit amount due with every billing cycle.
Type of interest rates
In terms of rigidity, there are two types of interest rates for credit cards- fixed and variable. The difference between these two is that fixed interest rates do not change, unless certain specific circumstances arise. In the case of your fixed interest rates changing, the credit card issuer has to notify you in advance. On the other hand, variable interest rates can change. This is mainly because variable rates are tied to other interest rates such as prime rate. In that case, if the prime rate changes, the credit card interest rates will change. Your credit card issuer doesn’t need to notify you in advance for these changes, as long as they’re due to a change in the index rate (the rate to which their interest rates are tied, prime rate in the example given above). Most credit card interest rates are variable.
Different APRs
Your credit can have different APRs. For example, your issuer might charge you interest at different APRs for purchases and different for cash advance, etc. These charges are mentioned in the credit card disclosure. Your card might also have a different APR for penalty, when you miss a payment or make a late payment. In case your credit card has different APRs for different balances, any amount remaining after minimum payment amount from what you paid goes to the balance with highest APR. For instance, let’s say your purchase balance is $200 with 15% APR and cash advance balance is $100 with 20% APR. Your minimum payment is $25 and you paid $50. The remaining $25 will be counted as a payment for your cash advance balance because its APR is higher. This way you won’t be charged unnecessarily in case of variable pay rates
How to minimize or avoid paying interest?
To avoid or minimize paying interest, you can pay the total amount due every month before on on the due date. With some balances like cash advance however, there is no grace period to avoid paying interest and it starts counting right after you use it. In that case, the best way to minimize the interest is to pay the balance as quickly as you can. Sometimes not being regular with paying your credit card dues can also harm your credit score. The best thing to do is avoid any hassles as such. However, if your credit score is damaged, good online services such as Velocifin can help you repair your credit score. Keep in mind that to maintain a good score henceforth, pay off the dues within the grace period.
Those were all the main things about credit card interest rates that you should know and hopefully the information was helpful. Remember, always read your credit card disclosure so that you have an idea of the interest rates and can calculate the charges.