Maintain Your Finances By Checking And Managing Credit Card Apr
Understanding credit card APR helps you understand how credit card interest can accrue quickly and why it helps to regularly monitor your rate and your total balance.
As a next step, see if you qualify for a credit card with a lower purchase APR. If you find a lower rate credit card that also offers balance transfers, transfer the current balance from your higher-APR card, and start using extra cash to pay it down throughout the month.
How To Lower A Credit Card Interest Rate
You can try contacting your issuer and ask them to lower your rate. If your payment history has been consistently on time, they may be able to lower your APR by a percentage point or two.
If they are unable or unwilling to to offer you a lower rate, it may make sense to focus on improving your credit score so that youll qualify for better rates. Steps you can take include making sure youre making your payments on time and lowering your overall credit utilization by not carrying too high of a balance on your card.
If the card issuer still wont lower your rate, you may want to consider a card with a 0% APR balance transfer offer, especially if the ongoing rate after the promotional time period is lower than your current credit card.
Theres one other way you can avoid paying interest altogether: by paying your balance in full every month, if possible.
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:
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Figure Out How Often Your Credit Card Interest Is Compounded
The first step is to figure out how often your credit card interest is compounded how often the interest is added to your original balance. Most credit card issuers will compound interest daily, though you can find out what your particular issuer uses in the pricing information of your card.
You’ll want to look for the line “How We Will Calculate Your Balance.” If, for example, the issuer uses a method called “daily balance,” this means your interest is compounded daily.
Between Rewards Programs And Greater Financial Flexibility Credit Cards Have A Lot To Offer But If You Dont Know How Credit Card Interest Works Youll Have A Hard Time Maximizing Your Cards Benefits
In an ideal world, youd never miss a monthly payment or carry a balance on your credit cards. But many Americans do carry a credit card balance from month to month. According to the Federal Reserve Bank of New Yorks Household Debt and Credit Report from the second quarter of 2020, credit card balances stand at approximately $820 billion.So, whats the problem with carrying a balance and having credit card debt? In many cases, it boils down to three letters: APR.
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Balances On Your Credit Card
You’ll need to add the balances from every day in the 25-day billing cycle and divide by the length of your billing cycle .
Here’s the math: / 25 = $4,808
Your average daily balance would be $4,808.
If you had a balance from the prior billing cycle, you’d include that in the addition part of your balance calculation. And if you made any payments during your current billing cycle, make sure you subtract them when you add up current balances.
How To Avoid Interest Charges On Credit Card
As we mentioned above, the best way to avoid paying credit card interest is to avoid carrying a balance altogether, but again, we get this isn’t always possible.
If you can’t pay off your balance in full, do be sure to try and pay it down as much as you can, and if that’s still not feasible, consider transferring your balance to a balance transfer credit card with a 0% intro APR period to give yourself some more time.
The CitiÂ® Double Cash Card – 18 month BT offer, for example, offers 0% intro APR on balance transfers for 18 months. Eighteen months is a solid period of time to pay down a balance while saving yourself some money on interest charges. Just be aware though that once the intro period expires, standard 13.99% â 23.99% APR applies, so it’s important to pay off your balance in full within the intro time frame to avoid paying any interest once it expires. Citi is a CardRatings advertiser.
This card also earns up to 2% cash back â unlimited 1% cash back when you buy, plus an additional 1% as you pay for those purchases. To earn cash back, just pay at least the minimum due on time.
Keep in mind though that these new purchases will accrue interest if you’re not paying them off in full each month, so if your primary purpose is to avoid paying interest fees, and you can’t pay off your balance in full each month, it might be best to just use this card for its intro 0% balance transfer APR offer until you can get your finances under control.
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How To Avoid High
If you leave this behavior unchecked, youll find yourself fast approaching your credit card limit or maxing it out entirely. Then come the painful weeks and months of desperately trying to dig yourself out of the debt trap youve fallen in.
Meanwhile, the interest quietly accumulates.
Learning how to sidestep the debt trap of credit cards means fundamentally changing the way you use them.
In this article, well explore the credit card trap in more detail, uncover the five most common debt trap cycles, and offer some actionable steps to take to rid yourself of the burden of debt permanently.
How Credit Card Companies Determine Their Aprs:
- Creditworthiness is the main factor. Cards offered to people with good or excellent credit usually have lower APRs than cards available to people with less-established credit.
- Most credit card APRs are advertised as a range. When you get approved for a credit card, the issuer will determine what APR to assign based on your credit history, income, debt and more.
- Most credit card companies determine their APRs by adding a designated number of percentage points to the prime rate, as published by The Wall Street Journal.
- Credit card APRs are indirectly determined by the strength of the economy. During downturns, 0% credit card offers tend to disappear. And the average credit card APR is closely tied to the Federal Reserves target rate.
- If you dont carry a balance from month to month, you wont pay any interest. But if you dont pay in full by your due date , you will owe interest on the remaining balance after that day. You will also owe interest right away on cash advances. On balance transfers, interest accrues right away or after any 0% introductory APR ends.
If youre wondering how much interest youll pay each month, youll need to know the Daily Periodic Rate . Divide the APR by 365, the number of days in a year. Multiply that figure by the number of days in the billing cycle. You can also use WalletHubs .
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How Does My Credit Card Company Calculate The Amount Of Interest I Owe
Many credit card companies calculate the interest you owe daily, based on your average daily account balance.
Often card companies charge one interest rate for purchases and different interest rates if you use your credit card to get cash, to write a check using your credit card account, or for other transactions. If your card has a grace period, you can avoid paying interest on purchases if you pay off your balance in full by the due date each month.
How does the daily interest calculation work?
Many issuers calculate the interest you owe daily, based on the average daily balance. The interest charged daily is called the daily periodic rate. Since interest is accruing daily, not monthly, this means that if you dont have a grace period, the sooner you pay off all or some of your balance, the less interest you will pay.
How do I know what APR applies to different types of balances?
Your statement must show each category with a different APR and the amount of the balance that falls in each category. If your card has a grace period , the grace period usually applies only to the category of new purchases and only if you were not already carrying a balance.
How do my payments affect the amount of interest I owe?
Reduce The Number Of Cards You Own
Ideally, you should cancel or cut up all your cards, one by one, after youve paid them off.
That being said, you may consider keeping one to use in the event of emergencies.
Another upside of keeping at least one line of open credit is that it improves your overall credit score provided you manage it responsibly, of course.
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Improving Your Credit Can Get You Lower Rates
Lenders may offer you a different APR on your loan depending on your creditworthiness and the repayment term you choose. Those applicants with higher credit scores and lower debt-to-income ratios may qualify for lower interest rates and finance charges, leading to a lower APR.
To improve your credit and avoid late payment fees, make all your debt payments on time. Paying down your credit card balances can also help your credit by lowering your .
If you need to borrow money now and dont have time to improve your credit first, you can still compare lenders offers to figure out which loan has the lowest APR. Often, you can start by getting prequalified or preapproved for a loan to see your estimated APRs and terms.
All else being equal, the lowest APR may be best. However, keep the big picture in mind before taking out a loan. For example, lenders may offer you a lower rate on shorter-term loans, which can lead to a lower APR but higher monthly payments. If thats not affordable, the longer-term loan with a higher APR may be best.
How To Calculate Credit Card Costs
Use the credit card interest calculator above to help work out the costs of owning a credit card and how much interest you will pay.
Our credit card interest calculator will show you how long it will take you to pay off your balance based on what you repay each month, and how much it will cost you overall including the interest payable.
Just enter your current balance, APR and monthly repayments. You can then adjust your monthly repayments to see how paying more or less each month will change your debt.
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The More You Know The Less You May Have To Pay
Charles is a nationally recognized capital markets specialist and educator with over 30 years of experience developing in-depth training programs for burgeoning financial professionals. Charles has taught at a number of institutions including Goldman Sachs, Morgan Stanley, Societe Generale, and many more.
When Should I Pay Interest On My Credit Cards
A credit card is basically a one-month loan from the card issuer with a credit limit . If you pay it off each month, you are not charged interest. However, if you carry a balance, you are charged interest. If you miss a payment date or skip a payment you will also incur hefty penalties.
The important number here is your annual percentage rate or APR. Despite the word annual, this rate is calculated daily and applied to any balances remaining on the card at the end of each month. The terms APR and interest rate are used interchangeably by the credit card companies.
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Variable Fixed And Promotional Rates
Officially, there are 3 types of interest rates for credit cards variable, fixed and promotional. Realistically, however, there is only one. They are all variable to one degree or another.
Some credit cards may start out with fixed and promotional rates, but inevitably those rates change, effectively becoming variable.
Nonetheless, you may choose to start with either or fixed or promotional rate because it suits your goals. Here is a review of the pros and cons for all three:
Rewards Cards Have Higher Rates
Pay particular attention to the average percentage rate when youre filling out a credit card application. Some credit cards have a single purchase APR for all customers. What is a good credit card interest rate? Most have a range lets say, 13% to 23% depending on your creditworthiness. Those rates are generally tied to the prime rate .
Keep in mind that rewards credit cards the kind with points or cash-back offers generally come with higher interest rates. Make sure the benefits outweigh the risks.
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What’s The Difference Between The Interest Rate And Apr
Sometimes you see the terms “interest rate” and “APR” thrown around interchangeably, but they’re actually separate concepts in some contexts. For mortgages, car loans and other types of installment loans, the APR, or annual percentage rate, includes both interest and other charges such as points and fees. So your interest rate and APR on a mortgage, for instance, will slightly differ.
But when it comes to credit cards and other types of revolving credit accounts, the two terms mean the same thing: Your APR is your interest rate. Any additional credit card charges, such as annual fees and late fees, are not figured in to your APR. To find out more, see “APR vs. Interest Rate: What’s the Difference?”
How To Avoid Credit Card Interest
Smart consumers don’t waste their money on credit card interest and employ a variety of strategies to minimize charges.
The ideal strategy is to pay your bill in full before the due date so you don’t get charged interest. But if you take cash out of an ATM with your credit card, or pay anything less than the full amount on your statement, you will incur finance charges.
Cash advances are usually excluded from the grace period rule. In other words, there are no interest-free days for cash advances, and thereâs usually a service fee to pay as well. Interest on cash advances is charged immediately from the day the money is withdrawn.
The best strategy is to avoid cash advances and pay your credit card bills in full every month.
Remember: Credit cards are convenient tools that can be used to your advantage, but you must be careful and stay out of debt. Only buy what you can afford to pay for immediately.
Already in debt? Don’t worry. Calculate credit card interest and payoff time-frames by running some scenarios through our Credit Card Interest Calculator. Realize the cost of staying in debt, make a payoff plan, and get out of debt!
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Best Credit Cards With Introductory 0% Interest
The right 0% intro APR credit card can help you avoid interest on a large upcoming purchase or on balances you transfer from other credit cards. Just remember, introductory APR offers only last for a limited time , and your remaining balances will accrue interest at the regular variable APR after that. You should have a plan in place before applying for a 0% intro APR offer, and only charge purchases you can afford to pay down before the introductory period ends.
With that in mind, here are some of our favorite 0% intro APR credit cards available now:
Chase Freedom Unlimited®
- Intro bonus:
- at our partners secure site.
AAdvantage® Aviator® Red World Elite Mastercard®
- Intro bonus:
- 15.99%, 19.99% or 24.99% variable based on your creditworthiness
- Recommended credit:
- at our partners secure site.
Capital One Quicksilver Cash Rewards Credit Card
- Intro bonus:
When Is Credit Card Interest Charged
If you donât pay your balance in full, then the unpaid portion of your balance is carried over from one billing cycle to the next. This is known as a revolving balance. And revolving balances typically accrue interest. You can reduce the amount of interest youâre charged by paying down more of your revolving balance and by paying it down quickly and on time.
Keep in mind: Interest isnât only charged on purchases. Interest is also typically charged on transactions like cash advances and balance transfers. And your APR for these types of transactions may be higher than your credit cardâs purchase APR. Cash advances and balance transfers may also come with other fees as well. And cash advances generally start to accrue interest immediately.
You can check your credit cardâs terms and conditions to find out for sure.
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