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How To Figure Interest Rate On Credit Card

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How To Calculate Credit Card Interest Rates?

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How do Credit Card interest rates work?

Credit card interest rates are usually quoted in terms of .

A low or lower APR means you will have less interest to pay on your credit card debt. It will cost less to borrow money than if your credit card had a high APR. However, some credit cards have longer interest-free periods which will also affect the amount of interest you are charged.

Saving Money On Credit Card Interest

  • 1Find lower interest and no fee credit cards. Do an Internet search on “low interest rate credit cards” or “zero percent introductory rate credit cards” or “no annual fee credit cards.” Once approved, it is easy to make a balance transfer from your current high interest cards.XResearch sourceXResearch source
  • If you keep your credit score high by paying all your bills on time, you will get a lower interest rate.
  • Check the interest rates on cards with your bank or credit union if you have been a good customer.
  • 2Pay more than the minimum amount. Most credit card statements will include a section that shows how much you will pay in total if you only make the minimum payments versus paying more than the minimum each month. You will pay your cards off quicker and it will improve your credit score if you can add at least $10 to the minimum amount owed each month. Once you pay a card off, add that former payment amount to another card’s payment to quickly pay down another high interest card.
  • Be sure you make minimum payments on all credit cards to protect your credit score, but add extra payments to the highest interest cards.
  • 3Take advantage of zero percent offers. If you have a credit score of at least 690 you will probably receive offers in the mail for zero interest credit cards for a year or more. Once approved, transfer your high interest cards to a zero interest card. Try to pay them off before the end of the zero interest time period.Advertisement
  • Should I Borrow On A Credit Card

    Whilst there are often some very good deals out there on credit card interest rates , you should always check the small print on each offer to find out how long the deal lasts.

    As an example, a 0% interest deal may last for 6 months, at which point the interest rate might rise to 15%. Get caught up in that and you’ll suddenly find yourself paying high interest on your credit loan at the end of the first 6 months.

    Most financial advisors would agree that although credit cards are convenient, they are often a very expensive way of borrowing money and should be avoided if possible. Borrowing money long term on a credit card does not make good financial sense. If you already have a large credit card bill, shop around and see if you can move the balance across to a credit card with a lower rate. It’s well worth the effort.

    Recommended Reading: /mymacyscard

    Calculate Your Interest Charges

    Now that you found both your average daily balance and daily rate, you can calculate your interest charges. This can be done by multiplying your average daily balance by the daily rate, then multiplying that amount by the number of days in your billing cycle.

    Here’s the math: x 25 = $66.11

    The result would be a $66.11 interest charge during that billing cycle.

    Editorial Note:

    Types Of Credit Cards

    5 Ways to Calculate Credit Card Interest

    Different types of credit cards suit the needs of different types of spenders. For simplicity, it would be wise to find one that aligns best with the user’s financial intentions for instance, a person who is not an extravagant spender and not interested in anything except getting the best bang for their buck can probably live with just a no-fee cash back card. However, it is very possible for people to carry multiple credit cards for their different advantages, even if it requires a bit of management. What’s important is that they are all paid off in a timely manner.

    Cashback: These offer cashback on all purchases, usually 1%, 1.5%, or 2%. Another type may have up to 5% cashback on selected categories of merchandise or services, which normally rotate quarterly.

    Rewards: These make up the bulk of most credit cards. The types of rewards usually range between airline miles, hotel bookings, and dining benefits. Credit cards that offer more rewards or miles will generally require annual fees, and it is up to each spender to evaluate their spending habits to decide whether a no- or low-fee card with low rewards is preferable to a high-fee card with high rewards.

    Recommended Reading: How To Pay Best Buy Credit Card On App

    Are There Limits To The Interest Rate A Credit Card Company Can Charge

    According to the Consumer Financial Protection Bureau, there is no federal law that limits the interest rate a credit card company can charge. However, the state where the credit card company is headquartered may have laws that govern interest rate limits.

    Interest rate limits are imposed for military service members. As of 2017, the Military Lending Act limits the amount of interest that active-duty military service members and covered dependents can be charged for credit card accounts. The Servicemembers Civil Relief Act limits the interest rate to 6% for credit card debt that was incurred before starting active military service . If you have active-duty status, you can qualify for the 6% interest rate cap, youll need to notify the credit card issuer in writing and send them a copy of the military orders calling you to active duty so that they can calculate the interest rate reduction for debt that you incurred before attaining active-duty military status.

    Editorial Note: Compensation does not influence our recommendations. However, we may earn a commission on sales from the companies featured in this post. To view our disclosures, . Opinions expressed here are the authors alone, and have not been reviewed, approved or otherwise endorsed by our advertisers. Reasonable efforts are made to present accurate info, however all information is presented without warranty. Consult our advertisers page for terms & conditions.

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    Key Things To Know About How Much Interest You’ll Pay On Your Credit Card

    • If you pay off your balance in full by your due date, you won’t owe any interest.
    • If you carry a balance from month to month, the interest you’ll owe depends on your Annual Percentage Rate . That shows how much interest you’d pay in a year. But since credit card interest gets charged daily, your card’s interest rate is its APR divided by 365.
    • The average APR among new credit card offers is 18.24%. But credit card APRs vary widely based on the applicant’s credit standing.
    • Nearly all credit card APRs are variable, as opposed to fixed, meaning they’re based on a particular benchmark interest rate. This usually is the prime rate, which banks use when lending to each other.
    • Many cards offer lower introductory APRs on purchases and balance transfers for a limited time, often starting at 0%. Once the introductory period ends, the APR will change to the normal rate.

    There’s no way to tell you how much interest you’ll owe without knowing your card’s balance and APR as well as the monthly payment you can afford. But if you plug that info into WalletHub’s calculator, you’ll have your answer in no time.

    To get a low interest credit card, start by checking your credit score and figuring out how long you expect to need a low interest rate for, in addition to why you need it. Low interest credit cards usually require good credit or better, and low rates are available for new purchases as well as balance transfers.

    Recommended Reading: Pay Best Buy Credit

    Repaying Credit Card Debt: Two Interest Scenarios

    Lets say John and Jane both have $2,000 balances on their credit cards, which require a minimum monthly payment of 3%, or $10, whichever is higher. Both are strapped for cash, but Jane manages to pay an extra $10 on top of her minimum monthly payment. John pays only the minimum.

    Each month John and Jane are charged interest on their cards outstanding balances at an APR of 20%. When John and Jane make payments, part of their payment goes to paying interest and part toward principal .

    Here is a breakdown of the numbers for the first month of Johns credit card debt.

    • Principal: $2,000
    • Payment: $60
    • Interest: /12 months = $33.33
    • Principal Repayment: $60 – $33.33 = $26.67
    • Remaining Balance: $1,973.33

    These calculations are carried out every month until the credit card debt is paid off.

    If John continues paying only the minimum, he will spend a total of $4,241 over 15 years to pay off his $2,000 in credit card debt. The interest alone will have cost him $2,241.

    Because Jane is contributing an extra $10 a month, she’ll pay a total of $3,276 over seven and a half years to cover her original $2,000 in credit card debt. Her interest charges will total $1,276.

    The extra $10 a month saves Jane almost $1,000, compared with John, and cuts her repayment period by more than seven years.

    The lesson here is that every little bit counts. Paying twice your minimum or more can drastically cut down the time it takes to pay off the balance, which leads to lower interest charges in total.

    Different Types Of Interest And Apr

    How to calculate Credit Card Interest

    There are other details in your cards fine print you should review to understand how much you could pay in fees if youre not careful. Heres what you need to know.

    A credit card can either have a fixed APR or a variable APR. A fixed APR typically remains the same, but it can change in certain circumstances, such as if your payment is more than 60 days late or when an introductory offer expires. A variable APR usually changes with the prime rate, as published in the Wall Street Journal. Many variable interest rates start with the prime rate, then add a margin. The result is your variable APR.

    The purchase APR will be used to calculate how much interest youll pay on an outstanding purchase balance, if you have one. If you have excellent credit , you may be more likely to qualify for a lower interest rate because a credit card company may consider you a lower-risk customer.

    If you have fair or poor credit , you may get a higher interest rate if youre approved for the card. This means itll cost you more every time you carry a balance with your card, so be sure to pay off your balance on time and in full every month, if possible.

    Also Check: How To Cancel My Jcpenney Credit Card

    How To Avoid Or Reduce Credit Card Interest Charges

    If you want to avoid paying credit card interest charges, or minimize the amount of interest youll pay in a billing cycle, here are a couple of things you can do.

    • Pay your credit card bill in full. Credit card companies generally give you at least a 21-day grace period between the purchase date and the payment due date. If you pay off your balance in full and dont have any cash advances outstanding, you wont be charged interest on new purchases made during this interval.
    • Pay a little more than the minimum. If you cant pay off your full balance, consider paying off as much as you can to avoid late fees and reduce the overall balance thats subject to interest. The minimum payment is typically up to 3% of the outstanding balance. Anything you pay over this minimum will further reduce your interest charges.

    Calculating Interest For Fixed And Variable Rates

  • 1Understand how these rates are similar to and different from each other. Both rates are types of “purchase” APRs, meaning that they apply to normal purchases made on a credit card. You need to know your Daily Periodic Rate to calculate how much interest you pay on your balance for the month. This is explained in the next step. The important thing to note is that if you pay off the balance before the end of your billing cycle, you do not pay interest on your purchases for either of these “purchase” APRs. Interest is applied only to the outstanding balance at the end of each billing cycle.
  • A fixed APR won’t change unless you continually fail to pay on time. At that point, the credit card company will send you a letter setting your new default/penalty rate.
  • A variable rate can change depending on national rates or other economic factors. For example, it might change based on fluctuation in the federal prime rate published by the Wall Street Journal.XResearch source
  • Look at your contract or credit card statement to figure out what your fixed or variable APR is.
  • 2Calculate Daily Periodic Rates . Credit card companies usually calculate interest charges on a monthly basis. Because months vary in length e.g., January is 31 days and February is 28 days most companies use DPRs to calculate interest. To calculate your DPR, divide your annual APR by 365 .
  • Take, as an example, a fixed or variable APR of 19 percent: 19 ÷ 365 = 0.052. This is your DPR.
  • Read Also: How To Pay Best Buy Credit Card On App

    Factors That Determine Interest Rates

    Interest rates can come in all sizes, but for credit cards they generally fall into one of three categories: variable rate, fixed rate and promotional rate. Most companies issue cards tied to revolving credit. Users of these cards are allowed to carry a balance on their accounts at the end of every billing cycle. Cardholders who carry a balance will see an interest charge on their next bill.

    There are four major credit card companies Visa, MasterCard, American Express and Discover and several factors that go into the interest rate charged on each of their cards.

    Among the factors:

    Calculating Interest For Default/penalty Apr

    Credit Card Interest Calculator
  • 1Know what a default/penalty APR is. A default/penalty rate is higher than the rate you got when you signed up for your card. It’s triggered when you violate the penalty terms in your contract. Examples of violations might include exceeding your balance limit or consistently making late payments.
  • 2Figure out what your default/penalty APR is. You may be able to find a standard default/penalty APR somewhere in your statement or contract. It’s more likely, though, that the bank will send you a letter telling you that it’s changing your rate. The Credit Card Accountability Responsibility and Disclosure Act of 2009, or CARD Act, requires banks to give 45 days’ notice before adjusting your interest rate. Your bank will explain your new rate in the letter.
  • For example, you may have had an original APR of 20 percent. However, you missed two straight payments 60 days. You received a letter saying the credit card company was raising your rate to a default/penalty rate of 35 percent.
  • 3Calculate the DPR on your new rate. Divide your new rate by the number of days in the year, 365. In our example, you would complete the following equation: 35 ÷ 365 = 0.0958. This is the interest youre paying on a daily basis.
  • 5Multiply that monthly rate by your outstanding balance. Remember to convert the percentage to a decimal. In our example, 2.97 percent becomes 0.0297.
  • If you have a balance of $1,000 at the end of January, you pay $1,000 x 0.0297, or $29.70 in interest.
  • Read Also: What Is Credit Card Reconciliation

    Calculating Apr: A Step

    How do you calculate credit card interest? Ah, the magic question. Heres the answer in step-by-step fashion that may remind you of your high school math class:

    Steps to calculate credit card interest:
  • Look Up the APR on Your Credit Card: The interest rate you pay on your credit card is part of your monthly bill. It is calculated on a daily basis, so your APR must be converted to a daily rate. The math equation for that is annual percentage rate ÷ 365 . Lets say your APR is 16%. OK, so we go 0.16 ÷ by 365. That gives us a daily periodic rate of 0.00044.
  • Calculate Your Average Daily Balance: Interest is assessed on your average daily balance. The math on that is total billing amount ÷ number of days in billing cycle. To figure that out, look back at your statement. Start with the unpaid balance . Add up each debit entry and divide it by the number of days in your credit cards billing period. Thats the average daily balance.
  • Multiply Your Daily Periodic Rate by the Average Daily Balance: The math on this one is daily period rate times x average daily balance. Lets say your average daily balance was $1,200. So, we go 0.00044 x $1,200 and that equals $0.53.
  • Multiply by the Number of Days in Your Billing Cycle: If its a 30-day billing cycle, thats $0.53 multiplied by 30 and it equals $15.90. So, you will be charged $15.90 in interest for this billing cycle.
  • How Credit Card Interest Works

    Although credit card interest rates are set annually, they will charge you interest daily and bill you monthly. Credit card companies calculate interest based on your average daily balance. That means that if you are not paying your credit card balance in full, you will not only pay interest on purchases but also on the interest itself!

    The average daily balance method is used to level out the day-to-day fluctuations caused by payments and purchases making it easier to calculate interest. The average daily interest rate is usually shown on billing statements but few customers understand the implications. Most people just see the aggregate finance charge on their bill and have no idea that it represents a cumulative tally of each day’s interest charges for the entire month.

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