It’s hard to believe that such a simple question like How much interest will I be charged on my credit card? It could have such complicated answers, but it does, and it’s important to understand how these different elements interact.
There are two primary types of interest charged on credit cards, annual percentage rate (APR) and finance charges. APR applies to the entire balance, while finance charges are applied monthly and only apply to outstanding balances from month to month. So let’s dive into how these work and how they affect you as an individual consumer.
How Is Interest Charged on a Credit Card?
According to SoFi, “Credit cards charge different interest fees on purchases, cash advances, and balance transfers. First and foremost, you can find your credit card interest rate in the terms the lender gave you on your most recent statement. Keep in mind that credit card interest rates can fluctuate from month to month.” Understanding the interest charge on credit card payments depends on two main factors:
1) The Type of Card You Hold
A debit card, credit card, or another type of prepaid card can impact how your interest is calculated. And even if you have a traditional credit card, there’s more than one way for that interest to be accrued and charged.
2) The Rates Associated With Your Balance
There are two key terms you need to understand when it comes to credit card interest. One is your APR—the Annual Percentage Rate. This indicates what rate you’ll be charged if you carry your balance for one year. The other is your current (or ongoing) daily interest rate, which is often referred to as just the interest rate and will be charged every day.
You Should Always Consider Avoiding Debt Completely
In general, it’s best to avoid debt as much as possible and just save up enough money to purchase something outright. Consider only applying for rewards cards if you can pay off your balance in full each month. Otherwise, use a credit card as intended – as an emergency line of credit that can be paid off every month (or better yet, every week).
If you carry a balance from month to month, be prepared for hefty interest fees. If you choose to carry a balance, aim for cards that offer rewards such as cashback or travel miles. As long as you don’t spend more than you can afford and make sure to pay your bill on time every month, keeping track of interest shouldn’t be too complicated.
These Are the Four Ways Credit Card Companies Charge Interest
1. Annual Percentage Rate (APR) This is what you see advertised, and it’s also how much interest you pay if you don’t pay your balance in full each month.
2. Cash Advance APR If you take out cash from an ATM or use your credit card as a cash advance at a casino or other location, you’ll be charged interest at an APR typically higher than your regular rate.
3. Penalty APRs Your card may have penalty APRs for late payments, going over your limit, or making a payment that bounces.
4. Penalty Fees Some cards charge additional fees such as paying late or exceeding your limit; these fees are added to any interest charges you already owe.
In most cases, it’s difficult to avoid paying some interest when you have an outstanding balance that you have yet to pay off. Some credit card companies will start charging interest if you don’t pay off your balance in full every month. When interest is added to your balance, it can become costly and even put you into debt.
Paying your credit card balance in full each month will always be best for your credit score, but it’s not that difficult to determine how much interest you’ll have to pay if you carry a balance.