Credit Card Interest – How It’s Calculated & How To Avoid Paying It

Credit Card Interest – How It’s Calculated & How To Avoid Paying It

We may be compensated when you click on links from one or more of our advertise partners. Opinions and recommendations are ours alone. Terms apply to offers below. See our Advertiser disclosure for more details. Receiving a credit card application can be exciting — specially if you ’ ve been preapproved for a card. recognition cards can allow you to make purchases immediately, even if you don ’ t actually have the money in your bank history. But before you run fully steam ahead into applying for any credit tease, it ’ s absolutely critical that you understand citation card interest, how it is calculated, and how you can avoid having to pay it.

Banks and early lenders providing you the opportunity to use borrowed funds might initially sound like a great cope ! But the reality is that these entities aren ’ t giving you anything for free — and if you ’ ra not careful, you can end up paying quite a act for the “ opportunity ” to use their money .

How Borrowing Money Really Works

Being extended recognition through a credit card is basically a process of borrowing money. In this case, the credit gives you money all at once that may not differently be available to you, particularly if you ’ re making a high-dollar leverage ( like a new calculator or boastfully riddle television ) .

Credit Comes at a Price

Credit — particularly credit that ’ sulfur provided to you through credit cards — can come at a very high price. Hot Tip: While many people don ’ t think of it this manner, the reality is that every time you use a credit wag, you ’ re getting a loanword from the lender or creditor that issues that calling card. In perfume, you are promising to pay back the total you charged on the card. Let ’ s take a look at a basic exemplar of borrowing money. hera, we ’ ll say that you borrowed $ 1,000 for 2 years with a simple concern rate of 5 %. In this casing, you will pay back a total of $ 1,100. This is because your 5 % interest rate equates to $ 50 per year ( $ 1,000 x .05 = $ 50 ). You paid matter to for 2 full years ( $ 50 x 2 years = $ 100 ), plus you repaid the $ 1,000 in principal. If you made these loanword payments on a monthly basis, the amount of your payment would have been $ 45.83 ( $ 1,100 divided by 24 monthly payments ). While this may look cut and dry, not all borrowing situations are the lapp — nor do all lenders and creditors charge a dim-witted rate of interest on borrowed funds. Though most credit cards do have a put rate of concern, if you don ’ deoxythymidine monophosphate wage back the stallion counterweight in full by the payment due date, the creditor that issued the wag will not merely charge you interest on the remainder of your principal balance but also on prior months’ interest charges. That can in truth add up !

The Impact of Different Interest Rates

Before you take on any type of debt ( particularly credit tease debt ), it ’ south significant that you shop around to secure the best pastime rate. One reason for this is because a deviation of even just half a percentage could be meaning in the entire amount of money that you end up paying back. As an example, take a look at 2 identical home loans, where the only remainder is the interest rate. In each case, the person is borrowing $ 100,000 for 30 years. With Loan # 1, the concern rate is 4.5%, while Loan # 2 has an interest rate of 5%.

Monthly Payment Total Repayment Amount
Loan #1 $506.69 $506.69 x 360 months = $182,406.71
Loan #2 $536.82 $536.82 x 360 months = $193,255.78

In this case, the difference in the cost of entire repayment between these 2 loans was about $ 11,000, based just on the unlike interest rate that was charged !

Deferred vs. Standard Interest

In summation to knowing the interest rate you ’ re paying — and how a lot it can add up if you don ’ triiodothyronine pay off your credit card balance each calendar month — it is significant to know whether you ’ re paying standard or submit interest because this can make a large remainder. As an model, many retailers advertise an “ basic ” interest rate of 0 % in order to entice consumers to apply for their citation cards. But just because you may not be charged matter to for the first few months doesn ’ thymine base that you won ’ thyroxine be charged interest at all. The terms “ no concern for 6 months ” and “ no sake if paid in broad within 6 months ” are 2 very different things. The latter is what ’ randomness called submit pastime. With submit interest, you could even end up paying more down the road if you keep a run balance on the circuit board. here ’ s why : Let ’ s say that you apply for a store credit card, where the interest rate is normally 26.24 %. When you initially apply for the card, though, the retailer offers you 0 % sake for a pin down promotional period if your symmetry is paid in fully within that time. This might sound like a great deal — and it could be, provided that you don ’ t carry a balance wheel on the circuit board and pay it off in full within the promotional period. however, if you don ’ deoxythymidine monophosphate, interest charges will be imposed on the starting balance at the APR for regular purchases retroactively from the date of purchase.  That ’ second because, with this character of finance, the interest on the purchases you make with the card international relations and security network ’ triiodothyronine waived. rather, it is postpone unless you pay your balance wheel in full. basically, it is continuing to rack up — even during your promotional 0 % interest pace menstruation. In cases like this, it can decidedly be to your advantage to pay off the entire remainder before the promotional time period ends. differently, you will be charged concern retroactively ( in this case, at a rate of 26.24 % ) starting from the initial purchase date. Another thing to consider ? Some people think by paying only their minimal payments, they ’ ll achieve a zero libra by the conclusion of the promotional period. deplorably, oftentimes this international relations and security network ’ t the case so individuals who think they ’ ve been acting as a responsible cardholder get a large surprise when postpone interest is applied. Bottom Line:  Know your terms when it comes to special financing ! The deviation between “ no pastime for 6 months ” and “ no interest if paid in fully within 6 months ” is a boastfully one !

pastime pace and APR Are not the Same — And Why It Matters

While you might be familiar with how pastime rates work in borrowing situations, the APR ( or Annual Percentage Rate ) can frequently seem confusing. In its most basic sense, an interest rate is the “ price ” that is paid for borrowing money. When it comes to accredit cards, though, interest rates are much stated as annual rates. This is referred to as the Annual Percentage Rate ( APR ). The APR takes into report the total price of borrowing money from the credit calling card issuer, which can encompass the interest rate a well as other fees that you incur .

The Dangers of Borrowing Too Much

today, it ’ second rare for people to carry around a great softwood of cash in their pockets. alternatively, using accredit can make transactions of closely any size much quicker and more convenient. unfortunately, though, borrowing besides much can end up being hazardous to your fiscal health. Because credit cards much have a nice-sized limit, it can be much easier to purchase on momentum as opposed to having a budget for the item or service. Bottom Line: Having besides much debt can besides make it much more difficult to pay off your balance wheel in entire each calendar month, which can end up costing you a fortune .

Are You Becoming Trapped by Credit Card Debt ?

When it comes to borrowing for purchases like a cable car or a home, credit rating cards work a bite differently than these types of loans. But, quite than having a standard repayment come each calendar month, the amount you owe on a credit rating card proportion can continue to grow due to compounding matter to — even if you don ’ t make any extra purchases .

How Credit Card Interest Is Calculated

Let ’ s take a expression at how citation batting order pastime is determined, and how it can start to snowball out of control if you don ’ deoxythymidine monophosphate pay off the libra each calendar month. In this exercise, let ’ s say you purchased some new clothes for $ 100 on the beginning day of the calendar month and used a credit rating batting order to pay for them. At the end of the month, your credit rating circuit board statement arrives ( for the sake of this bare exercise, let ’ s assume that this $ 100 invest purchase is the only meter you used your recognition card that month ). But the credit calling card party is nice adequate to let you make only a minimal payment of say, $ 10. Wanting to hold on to as much of your cash as potential, you go ahead and make just the minimum requital on the calling card on the ascribable date. Using basic mathematics, you would think that a $ 100 initial balance wheel minus your $ 10 requital means you immediately owe the citation tease company $ 90, but this international relations and security network ’ triiodothyronine actually how citation tease debt works ! Depending on the credit poster company and early factors such as your credit score ( a higher credit score normally means a lower matter to pace and frailty versa ), you may find that the interest rate charged on your balance is in the region of 20 % or higher ! There are a few primary ways that recognition card companies calculate interest, but we ’ ll use the simplest one — the daily average balance method. Credit menu companies will average your poise for every day of the month, then multiply that by the daily rate and the act of days in the bill cycle to determine your pastime owed. There are 3 pieces of information you will need to know to make this calculation :

  1. Your daily periodic rate, or DPR
  2. Your average balance on your card
  3. Days in the billing cycle

Daily Periodic Rate

Since an APR is an annual rate, your citation menu issuer will divide that total by 365 to determine a daily sake rate. If your APR is 20 %, for exercise, the daily rate would be 0.054 % ( or 0.000548 ). Hot Tip: Some cards use 360 days, so be sure to check your specific terms .

Average Balance

As we mentioned above, you ’ ve spend $ 100 on the first base day of the month. You use the previous calendar month ’ s daily average remainder in order to calculate the interest owed in the stream month, so it would be $ 100. This obviously gets a act more complex once you factor in concern owed and minimum payments made, so we ’ ll walk you through the next calendar month, excessively. Your starting balance in month 2 is calm $ 100 since you haven ’ t made a payment. Let ’ s say you made that requital on the fifteenth day of the month. You besides have to factor in the sake owed adenine well. That would mean that your average casual balance wheel for calendar month 2 is : ((100*15 days)+(91.64*15 days))/30 days = $95.82

Days in statement menstruation

Let ’ s keep it elementary and assume all months have 30 days.


To calculate your interest fees for the month, your accredit menu issuer multiplies the average daily counterweight by the numeral of days by the DPR. $100 average balance x 30 days x 0.000548 DPR = $1.64 in interest owed The total balance you now owe after your $ 10 payment is $ 91.64. Let ’ s run with this exercise to see how it plays out in late months. Example of Credit Card Interest Accumulation

Month 1 Spend $100 on Clothes
Month 2
  • Owe $100
  • Get charged $1.64 in interest
  • Pay $10 to reduce the balance to $91.64
Month 3
  • Owe $91.64
  • Get charged $1.58 in interest
  • Pay $10 to reduce the balance to $83.22
Month 4
  • Owe $83.22
  • Get charged $1.44 in interest
  • Pay $10 to reduce the balance to $74.66
Month 5
  • Owe $74.66
  • Get charged $1.30
  • Pay $10 to reduce the balance to $65.96
  • …and on and on!

At this rate, it would take you a little over 12 months to pay off this debt and you would have incurred over $ 11 in sake ( or more than 10 % of your original detail ). other credit wag issuers use a method acting called Daily Balance for calculating interest. With this method, matter to is calculated based on your balance on each individual day in your bill period. interest can be compounded casual or monthly for this method acting, depending on the terms of your card ( which will result in even higher rates than our example above ! ). To find out exactly how interest is calculated on your credit card, be sure to read your cardholder agreement.  The key here is not to let your credit menu balances get out of hand. If possible, try to pay them in full each month. differently, it could equate to a very high-interest lend on items that are not probably to increase in rate .

The Different Types of Credit Card Fees and Charges

Some of the most coarse accredit menu fees and charges include : Annual Percentage Rate (APR) As discussed above, the annual percentage Rate, or APR, is the price of borrowing money on an annual basis. If you ’ re late in making your monthly payment to the credit menu issuer, you may find that they will increase your APR. Annual Fee Some accredit cards come with an annual fee good for the privilege of using them. This fee could be $ 50, $ 100, or even more. While you may not like paying an annual tip, some credit cards can be well worth it if they offer attractive rewards. Late Fee If you do not make your credit menu payments on time, you can be hit with a belated tip. These fees are typically in the stove of $ 30 to $ 50 per occurrence, but they could be more depending on the poster. To avoid the belated tip — and a potential rise in your matter to rate — be sure to make your credit card payment on time each month. Over-limit Fee Credit card companies will about always put a limit on how much credit you can use. If you go over this terminus ad quem, the card ship’s company will typically charge you a tip ( normally called an “ over-limit tip ” ). Bottom Line: Before you make any large purchases or a phone number of smaller purchases, make sure that you know precisely what your citation limit is. Cash Advance Fee There are many credit cards today that will allow users to take a cash progress. In fact, some card companies even advertise this by sending users “ checks ” in the mail that just need to be signed and cashed. But before you rush to your local bank or ATM, you should know that most credit cards will charge you a fee for this type of transaction. That tip is in addition to the interest you will be charged on your outstanding balance until you have repaid the cash progress .

How besides much Credit Card Debt Can Impact Your credit

Using credit cards wisely by making seasonably payments each calendar month can help you raise your credit sexual conquest. But just the opposite can besides be true : having too much credit card debt can negatively impact both your credit score and your credit report. Your FICO score is used in more than 90 % of U.S. lend decisions, so it ’ s authoritative to gain ( and keep ) a high FICO mark to improve your odds of accredit approval and being eligible for the most attractive interest rates. There are 5 categories considered when determining your overall credit grade. Each of these carries a different percentage slant in terms of importance. These include :

  • Payment history: 35%
  • Amount of debt: 30%
  • Length of your credit history: 15%
  • New credit: 10%
  • Credit mix: 10%

As you can see, closely a one-third of your overall credit grade is based on how much debt you carry. This finical component of your score includes several factors, such as :

  • The total balance you owe
  • How many of your accounts have balances
  • How much of your available credit you are using

Hot Tip: The specific types of accounts where you owe money are besides taken into consideration. For model, if you owe $ 50,000 on a base mortgage, it is considered much more favorably than if you owe $ 50,000 on a credit batting order — particularly if you are at or near your total credit limit .

Tips for Using Credit Cards to Your advantage

Having 1 or more accredit cards can provide numerous benefits. In addition to allowing for agile and convenient transactions, many cards now offer respective points, rewards, and/or cashback on purchases. But spending excessively much money on your credit card or not paying off your poise every month can end up being dearly-won. By following some helpful tips, you can get into good habits and learn to use credit cards to your advantage. Start Small If you don ’ t have any prior experience with credit cards, be sure to start little. In other words, don ’ thyroxine charge besides a lot at once, and make surely you can pay off the wax balance measure when you receive your statement each calendar month. Make Your Payment on Time Always pay your citation wag poster on time, tied if you are not able to make the full sum. timely payments can significantly impact your score, excessively ; in this encase, it ’ randomness better to leave a symmetry on your batting order than reduce your credit score by making your payment late ( while besides incurring a late tip from the credit card party ). Hot Tip: If you ’ re in a real number bind and need more fourth dimension to clear off your balance and consequently reduce your interest payments, then you could look into transferring your balance to a accredit circuit board with 0 % intro APR on libra transfers. Determine Needs vs. Wants When it comes to making purchases, having a recognition calling card can decidedly open up a hale modern range of options. unfortunately, this can result in a goodly poise each calendar month, frequently racked up for items you very don ’ t need. With that in mind, make sure to only purchase items you truly motivation with your batting order and ensure you can make the payment when it comes due. otherwise, you may need to forgo sealed purchases. Don’t Sign up for Unneeded Credit Cards While it may be nice to receive a “ exempt welcome bonus ” that is being offered by a accredit card issuer, be careful. If a circuit board seller asks you to apply for their poster, keep in heed that doing so will typically require the company to check your credit rating, which can result in lowering your credit rating score. Cut up or Hide Your Credit Card(s) In extreme scenarios, you may need to consider cutting up or hiding your card ( s ) indeed you don ’ t make any more purchases on credit. even though doing thus can make your fiscal life a snatch less convenient, it can besides help ensure that you don ’ thymine rack up any more charges ( and the represent interest ) on your card ( mho ) .

When It Makes Sense To Use a Credit Card ( and When It Doesn ’ triiodothyronine )

Using credit cards to make purchases can offer relief and convenience. But fair like most other things in liveliness, there are times when it can make sense to use credit cards… and times when it doesn ’ thyroxine. overall, it can make sense to use a credit card if :

  • You are able to pay off your balance in full each month
  • The rewards you’re accumulating are worth more than the cost of the card
  • You want additional fraud protection on your purchases
  • You want to build or improve your credit score

alternatively, it can make sense not to use credit if :

  • You already have a considerable amount of credit card debt
  • Using a credit card would only add to your debt balance(s)
  • You are working hard to stick to a budget and be more mindful of your spending habits

In these cases, using cash or debit could be more beneficial for you.

Hot Tip: If you ’ ra diffident of the differences, see our article on debit cards vs. credit cards to learn which may be best for you .

Final Thoughts

credit cards can allow you to make more ( and larger ) purchases without the need to apply for a lend, and without having to wait until you have enough money in the bank to pay cash for an item or a service. But when you use credit cards, it ’ s besides imperative to look out for interest and early charges, as these can make the monetary value of your actual buy much higher. Using the right type of recognition poster responsibly can benefit you in many ways, including the accretion of versatile points or rewards .

informant :
Category : Finance

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