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How Does Credit Card Interest Work?

APR is generally expressed as a yearly amount. Although APR is stated as an annual rate, credit card companies utilize it to calculate the amount of interest that is charged on your month-long statement period.

In a perfect world, you’d never fail to make the monthly installment or carry an unpaid credit card balance. But this is not a perfect world, and that is why many people are in debt.

Many Americans carry an unpaid credit card balance throughout the month. According to a recent report, balances on credit cards total around $820 billion.

How do you calculate your APR?

To determine the number of fees you’ll have to pay for interest, you’ll have to know your average daily balance as well as the number of days in your billing cycle and your APR.

How to reduce or avoid the interest charged on credit cards

If you’d like to avoid the cost of interest on credit cards or reduce the interest that you have to pay during a billing cycle, here are some options you can take.

Pay the credit card invoice in full amount.

Credit card companies typically offer a minimum 21-day grace period between your purchase date and the payment due date. If you settle your balance in full and don’t have cash advances, You won’t have to pay interest on any new purchases you make during this period.

You should pay a little more than the minimum amount

If you aren’t able to pay the entire balance, think about making every effort to pay off as much as you can in order to prevent late fees and lower the total amount that’s at risk of being charged interest.

The minimum amount to pay is usually at least 3 percent of the outstanding balance. Anything more than the minimum amount will also reduce the amount of interest charged.

Does every credit card come with grace periods?

Not at all. Credit card issuers aren’t required to provide an extended grace period. It’s good to know that some do. If your credit card has grace time, your card’s issuer has to make sure that the bills are sent or handed over within 21 days of that due date.

Are you looking to cut down on the cost of interest?

There are more specifics in your credit card’s fine print that you must examine to know the amount you’re likely to incur in charges if not vigilant. This is what you must be aware of.

A credit card could be a fixed APR card or a variable one. The fixed APR is usually the same. However, it could change in certain situations.

For example, in the case of a payment that exceeds 60 days overdue or when an offer that is introductory expires.

Variable APRs usually change in line with the prime rate according to The Wall Street Journal. A lot of variable interest rates begin with the prime rate, and then you can add an additional margin.

Credit cards have different APRs

Here are the different credit card APRs to watch out for;

Purchase APR:

This is a rate of interest applied to purchases made using the card.

Account transfer APR (Balance Transfer):

This is the rate of interest that is applied to the balance transferred by one card into another.

Payday cash advance rate:

The rate of interest is applied to the amount of money you’ve borrowed through your credit card. This is typically more expensive and usually doesn’t come with the grace time.

The Consumer Financial Protection Bureau notes: “If you use your card to make an advance on cash , you will begin to pay interest on the date you made a transaction.”

Introductory APR:

The short-term promotional APR some credit card companies, provide in order to encourage customers to sign up. It can be applied to balance transfers or purchases for a short period of time which is usually lower than the card’s standard APR. Sometimes, it’s even 0 percent.

Penalty APR

This is the interest that is charged when you are late with payments or violate the card’s conditions and terms. This is generally the highest rate, but it could be charged if you pay more than sixty days overdue.

If you’re a victim of poor or fair credit (general scores between 599 and 699), it is possible to get an interest rate that is higher when you’re approved to use the card.

This means you’ll pay more each time you have an outstanding balance on your card, so make certain to pay the balance on the due date and in full each month, if it’s possible.

Important considerations before applying for a credit card

Find out the interest rates and whether they’re fixed or variable.

Know the variables that may permit the credit card company you use to alter your credit interest rate on your card.

Be aware that the introductory APR terms do not last for long.

If you make a payment in excess of 60 days behind, you could be charged an APR penalty, which means you’ll be charged more interest for a period of time or more.

The benefit? If you are able to make six consecutive payments on time the credit card issuer might be willing to alter the fee.



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