What you need to know about Credit Cards Interest Rates
Charging interest on credit cards is one of the ways credit issuers make money off their customers aside from the other fees they charge when customers use their cards for a foreign transaction, balance transfer, among others.
Although the issuers of your credit card might not say it to your face they will always want to make money off you through credit cards interest rate especially when you are unable to pay off the balance on your end before the end of the billing cycle.
The best way to avoid paying a high credit card interest rate is to pay back the balance from all the purchases made on your credit card on time. By this, you won’t have to pay any interest to your creditor.
However, you might run into a financial ditch which might result in you not paying your balance in full for that particular month. This is referred to as a revolving balance and interest will apply based on the interest rate set by your issuer.
What is Credit Card Interest?
This is the fee credit card issuers charge you after borrowing money from them. It is referred to as Annual Percentage Rate or APR. The APR varies
How Credit Cards Interest work
You will be charged interest by your issuer if you fail to pay your balance in full from the previous billing cycle. The interest will be charged on the outstanding balance you carried over into the new billing cycle. If you don’t pay up the balance and the interest on it before the second billing cycle ends, you will end up paying interest on your interest the following month.
If you carry a balance on your credit card, the interest will be calculated by multiplying each day by a daily interest rate which will be a deed to your balance. The daily interest rate is your Annual Percentage Rate (APR) divided by 365 (12 months)
Let’s assume that you have a balance of $1000 with an APR of 18% per year, your daily APR will be 18% ÷ 365 = 0.00018. Your daily interest will be $0.0018 which will be added to your balance of $1000 daily. The interest will continue to accrue daily unless you pay off the balance and the interest before the end of the billing cycle.
More on Credit Cards Interest Rate
There are other credit cards interest rates you should keep in mind such as balance transfer and cash advance. When you fail to pay up the balances on both, most credit cards impose a higher interest rate on them.
Variable Interest Rate which is also known as Variable APR is an interest rate that fluctuates which means it changes over time. The Variable interest rate is tied to another interest rate known as Index Rate.
So if the US Federal Reserve makes a change in interest rate either an increment or otherwise, it will apply to your credit card rate as well.
Fixed Interest Rate, on the other hand, is more stable and it doesn’t change, if it would, it will not be based on index rate. The following factors will make an issuer effect a change in the fixed interest rate on your existing balance with notice if;
- You completed a debt management program.
- Your Servicemembers Civil Relief Act interest reduction ended
- You’re more than 60 days late on your credit card payment.
- You had a promotional rate that ended.
You can decide to opt out of the increased interest rate and pay off your balance with the old interest rate after the issuer must have given you a 45 days notice before the new increment takes effect.
It is always advisable to pay one’s balance in full before the expiration of the grace period given by the issuer. The grace period is the amount of time one has to pay up his balances before a financial charge(interest) is imposed.