It’s a pocket-sized magic maker. One second you want something. The next minute, it’s yours — even if you DON’T. HAVE. ANY. MONEY.  It’s magic, indeed. But that magic doesn’t last long, because at some point you do have to pay it back — with interest. And that’s where the decisions begin.

What Is Credit Card Interest?

It’s that little something extra you pay for the privilege of borrowing money. How is it calculated? Well, most credit card issuers have an Annual Percentage Rate (APR). That percentage is what you pay on the unpaid amount of your bill at the end of your statement. And, yes, that is what you call debt. And if you don’t happen to pay your balance the next month-the debt starts to add up.

Monthly Interest Calculations

Calculating your monthly APR rate is relatively simple:

  1. Divide your current APR by 12 (12 months of the year).
  2. Multiply the resulting rate times the amount of your current balance.

If you currently owe $1,000 on your credit card and have an APR of 18%, calculate your monthly interest by dividing the 18% APR by 12 to get 1.5%. If you multiply that 1.5% by your balance of $1,000, you get $15.00-that $15.00 gets added to your balance.

Your credit card company may sometimes calculate interest with a daily periodic rate. In that case, divide your APR by 365 instead of 12 to get the daily rate. Multiply that by your outstanding balance. In the above example, you would have a daily APR of 0.049% and a daily interest charge of $0.50.

Either way, try paying your balance in full every month.

Types of Credit Card Interest

Credit card companies tend to charge a variable interest rate based on fluctuating market conditions. So, fixed interest rates are relatively uncommon except for personal loans and mortgage situations. Credit card issuers may also have different types of rates-which vary by card and customer status. Interest can be the following types:

Introductory APR

Most companies attract new customers by offering a 0% APR on balance transfers or purchases. That introductory term can run anywhere from 6 to 24 months.

Balance Transfer APR

Occurs when you transfer balances from existing credit cards or loans.

Purchase APR

Occurs whenever you purchase using your credit card.

Cash Advance APR

Use your credit card to get cash instead of purchase, you’ll incur a cash advance APR. Which can be higher than the purchase APR, but doesn’t have a grace period. Usually, you’ll pay interest from the transaction date.

Penalty APR

The highest rate is issued by a credit card company. You’ll incur this rate if you fail to pay your balances before the due date.

Most of the time, your APR will depend on your credit score. With a good one (720 or more) you might qualify for a lower rate since you’re considered a lower risk. Having a poor credit score, your interest rate goes the other way.

Factors Impacting Your Interest

A few handy things to know about what can influence your credit card’s interest rate:

Prime Rate

For one, the Federal Reserve sets a ‘prime rate’ that credit card companies use to establish the rate of interest. Your credit score and credit history also come into play.

Hard Credit Inquiry

When applying for a new credit card the issuer will perform a hard credit inquiry based on your credit report. It’ll look at your payment history, credit score, and number of credit accounts. So, it’s a good idea to improve credit scores before applying for a new one.

Ways to Lower Your Interest

Credit card interest can drain you emotionally, financially and land you in more debt. Here’s how to lower the interest and manage cards better:

  • Pay your entire monthly balance to avoid penalty interest charges.
  • Use cards with lower APRs to reduce interest. Introductory credit cards with 0% APR can also help.
  • Try using a zero-interest balance transfer credit card and move your balances to it. They’ll give you more time to pay your balance off to avoid interest.
  • Pay balances early in your billing cycle to avoid interest charges. Keeping an eye on expenses can help, too.

Bottom Line

Credit cards are convenient, allow flexibility and earn great rewards. We have an excellent selection from which you can choose. Paying them in full every month can save you significantly in interest expenses. If you can’t pay them off every month, make sure you keep track of your rates and shop around for cards that have better rates. Also, make sure you understand the terms and the fees associated with your credit cards.

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