How Is Credit Card Interest Calculated
When you fail to pay off the entirety of your credit card bill each month, your credit card company charges you a fee in the form of interest.
Your interest rate is determined by dividing your annual percentage rate by 365 days. An APR determines how much your loan costs you. Multiply your APR value by the current balance on your card and your daily interest rate. The result is your overall interest fee. Sometimes your intro APR level is lower due to a promotional period offered by lenders.
Different lines of credit have different interest rates, but these rates add a percentage to the balance that you already owe.
There are various online platforms you can use to calculate your personal rate as well.
Situation : You Have A High Interest Credit Card And Are Always Carrying A Balance Month To Month
If you’re in this situation, know that you aren’t alone. On average, Americans carry $6,194 in credit card debt. But it’s certainly costly and a reason to maybe close your high-interest credit card, says Ma.
If you carry a balance on a credit card charging you high interest, consider transferring that debt to a balance transfer credit card which gives you time to pay down your principal without accruing interest. To qualify for the longer interest-free periods, you will most likely need to have good or excellent credit , but there are options available for fair credit as well.
Whether you then close your high-interest credit card after you make the transfer will depend on just how much you are allowed to transfer. Your credit score will also determine the amount of debt you can transfer .
If you can’t transfer the whole amount of your balance, you will need to keep what’s left over on your high-interest card. In that case, you’ll want to pay off the debt on your high-interest card before paying off the balance on your balance transfer card since the latter isn’t charging you interest for a period of time.
The Citi Simplicity® Card ranked on CNBC Select’s best balance transfer credit cards because of its long balance transfer period. The card offers one of the longest stretches of interest-free time to pay off your debt with a 0% APR for the first 18 months on balance transfers .
Get Free Advice About Dealing With Debts
If you need more support or dont know where to start paying off debts, youre not alone.
Nearly half of people in debt told us they arent sure about the best way to pay off their debts, and that is where a debt adviser can really help you. make the right decisions so most of your money will go to paying off your debts. This means you could be debt-free sooner than you thought.
A debt adviser will:
- treat everything you say in confidence
- never judge you or make you feel bad about your situation
- suggest ways of dealing with debts that you might not know about
- check you have applied for all the benefits and entitlements available to you
- always make sure you are comfortable with your decision.
Three quarters of people who get debt advice feel more in control of their finances afterwards.
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How To Pay Less In Credit Card Interest
- Pay the card in advance. The best way to keep paying less interest on your credit card is to pay off your balance in full each month.
- Ask the lender to lower your interest. Many people think that the interest they pay on a credit card is fixed.
- Use cards for transfers.
- Pay with your cards with a personal loan.
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Consider A Balance Transfer
Before your balances build up, consider looking for a credit card with a 0% or low promotional rate on balance transfers. Yes, opening a new card might impact your credit score, and there may be a balance fee involved, but in the long run, your score and your own financial well-being may benefit from nipping that interest rate in the bud.
Steps to performing a balance transfer:
Apply for a balance transfer credit card with a zero or low-interest promotional period. Then, don’t use the card for purchases. Instead you should work out how much you have to pay each month so you completely pay off your transferred balance before the zero or lower interest rate period ends. If you don’t pay off your entire balance before the promotional period ends, your remaining balance will likely have a higher APR when your promotional period ends.
S To Negotiate A Decrease Apr
The method of getting your bank card price lowered solely includes a couple of steps, should not take greater than 15 to twenty minutes, and would not require any superior negotiating expertise. It simply takes getting the best data in your fingers and the best particular person on the telephone. Here is the way to negotiate with bank card corporations.
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Figure Out Your Credit Score
Some of the first things your credit card company will look at are your payment history and credit score. You can order a free annual credit report to ensure it’s accurate and to see your payment history and debt-to-income ratio . Reviewing the report — checking for late payments or other blemishes — will give you a sense of how assertive you can be when asking for a lower rate.
Read more: The best credit monitoring services
What Is A Good Apr For A Credit Card
As of April 2021, the average interest rate for a credit card is just over 16%. But the average card APR can differ from what a consumer might consider a good APR. For instance, some low-interest credit cards advertise minimum APRs just below 12% and, in rarer instances, less than 10%.
But a good APR is one that you can afford if you must carry a balance on your credit card. On the other hand, an exorbitant APR can bust your budget and prevent you from getting out of debt in a timely manner, especially if you have a lot of it.
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Requesting A Lower Rate
There are several things you can do to alleviate your credit card debt before it becomes an even larger burden. If you have a high interest rate that is making repayment difficult, one option to consider is requesting a lower rate from your lender. Credit card interest rates arent necessarily set in stone, so you may get a lower rate just by asking. A poll found that almost two-thirds of cardholders succeed this way.
If your financial situation has improved since you opened the card but your interest rate hasnt dropped, you may have a good case for a rate reduction. A history of regular use of the card and on-time payments also works in your favor.
Before you make the call, gather information that supports your request. Be sure the person youre speaking to has the authority to lower your rateyou may need to ask to speak with a supervisor. Finally, if your lender agrees to a lower rate, ask for confirmation in writing and the date you should expect to receive it.
Your Script For Seeking A Lower Apr
YOU: Hello. My name is ____, and Ive been a customer for years.
I feel Ive been a good customer over the years, and Id like to keep doing business with you, but my APR seems high and Id like to talk with someone about that. Is that something you have the authority to change?
CUSTOMER SERVICE REPRESENTATIVE: No.
YOU: In that case, could I please speak with a supervisor?
CSR: Just a moment.
YOU: Hi, my name is _____, and Im interested in talking with someone about lowering my interest rate. May I ask whom Im speaking with?
S: This is Jerry.
YOU: And Jerry, whats your last name and direct telephone number?
S: Jerry Smith, and Im at .
YOU: Thank you, Jerry. Heres why I feel my APR should be lowered. Id like a rate closer to 10 percent.
From here, the conversation could go several ways. If they agree to what you want, say thank you, ask for written notification of the change and the date you should expect to receive it, hang up and do a victory dance. If not, know in advance where you want to compromise.
YOU: Well, is there a lower rate that you could give me?
S: Well, let me see what we can do for you. Yes, I could give you an APR of 12.5 percent for the next 12 months.
If they refuse to lower your APR and you and it makes financial sense for you, move to cancel the card.
YOU: Id hoped wed be able to reach an agreement on this, but if you really cant give me a better rate, then Id like to close the account and finish paying off my balance.
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Five Ways To Reduce Credit Card Interest
Tip #1: Pay off your cards in order of their interest rate.
One way to reduce your interest rates is by paying off your debt with the lowest amount of interest. This way, youâll be able to settle your debt quicker, gain some confidence in the process of paying off debt, and see an increase in your credit score. Gradually, youâll work your way up to your most significant debt. This method is also known as the snowball method.
In comparison, you can also adhere to the avalanche method, which is the direct opposite. In this case, you focus on paying off your highest-interest debt first, then the next highest, and so on. This method takes bigger steps, faster.
Tip #2: Make multiple payments each month.
Paying off your full balance will help keep your interest down, either through a series of smaller payments or with one lump payment. Anything you donât pay as part of your minimum payment shifts over to the next month’s billing cycle, and fees will begin to compound. Donât skip a payment, either, or the fees will be even higher.
Pay off each purchase you make with your card as soon as possible. The earlier you pay, the less youâll need to worry about missing due dates and acquiring interest you canât afford on late payments.
Establishing a budget and only making necessary purchases on your credit card will keep your spending and credit utilization ratio in check.
How To Negotiate A Lower Apr
The process of getting your credit card rate lowered only involves a few steps, shouldn’t take more than 15 to 20 minutes, and doesn’t require any advanced negotiating skills. It just takes getting the right information in your hands and the right person on the phone. Here’s how to negotiate with credit card companies.
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Cons Of Personal Loans
- Might come with fees: Some lenders charge fees on personal loans, such as origination or late fees. This can add to your overall loan cost.
- Can have larger payments: Depending on your repayment terms, you might end up with higher monthly payments on a personal loan compared to a credit card. Before you sign for a loan, be sure your new payments will fit comfortably in your budget.
- No rewards: Unlike credit cards, personal loans dont come with any rewards.
Improve Your Credit Score
A good way to land an interest rate that you can comfortably afford is to take some steps toward improving your credit score before applying for a new credit card. One of the easiest ways to give your credit rating a boost is to pay your credit card bill early or on time every month. You should also refrain from opening too many new accounts, which leads to multiple hard inquiries on your credit report, and closing accounts, which can lower your . Both moves can negatively impact your credit score, along with other factors.
If you have a lot of debt in relation to your credit limits, you can also improve your credit score by paying off your debt. Most experts recommend keeping your credit utilization rate below 30 percent for the best results, which means maintaining $3,000 or less in revolving balances for every $10,000 in total credit you have.
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Pros Of Balance Transfer Credit Cards
- 0% APR: Some balance transfer credit cards come with a 0% APR introductory offer, which means you can avoid paying interest if you pay off your balance before this period ends.
- Could help build your credit: If you make all of your payments on time, you might see your credit improve which could help you qualify for better rates in the future.
- Rewards or perks: Depending on the card you choose, you might have access to various rewards or perks, such as cash back or points.
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Avoiding Interest On Cash Advances
Unlike regular purchases, interest will begin accruing immediately on cash advances.
This means you wont be able to avoid paying some amount of interest on a cash advance unless you pay it off the same day. If you have the money to pay it off right away, though, you probably dont need the cash advance in the first place.
Most credit cards will also charge you a fee when you use your card for a cash advance. Youll have to pay this cash advance fee on top of any interest fees the card issuer charges. A typical cash advance fee is 5% of the amount withdrawn, with a minimum fee of $10.
We generally recommend avoiding cash advances. Theyre an expensive way to borrow money. And while a cash advance by itself wont damage your credit, if it drives your credit utilization rate up higher, it might trigger a drop in your credit scores.
Now that youve read this guide, do you understand how you can avoid paying credit card interest? Please hit the Ask button on the top right corner of this page to ask any questions you have. Or, just get in touch to say hi and let us know what you think of this guide.
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Make Multiple Payments Throughout The Month
You dont have to wait till the end of your credit cards monthly billing cycle or for your statement to arrive in the mail to make a payment. In fact, making payments more frequently throughout the month can actually help you reduce the amount of interest you owe.
Thats because interest on most credit cards is calculated based on the average balance you carry every day not your balance at the end of the month.
Let me explain:
If you carry a credit card balance of $1,000 for the entire length of your 30-day billing cycle, you would owe interest on the whole $1,000 by the time your statement period ends.
But if you paid down $500 early halfway through the billing cycle, your average daily balance for the month would fall to $750: $1,000 for your first 15 days and $500 for the remaining 15 days.
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Why Try To Get Your Rate Lowered
You’re probably reading this article because you’ve decided to step up and do battle with your credit card debt. With this in mind, it’s crucial to realize that even a small cut in your credit card’s annual percentage rate can shorten the amount of time it takes for you to become debt-free.
Consider a credit card with a $10,000 balance that’s charging 25% annually. All else being equal, that credit card balance will cost you $2,500 in interest over the coming year. If you could get your interest rate on that credit card lowered from 25% to 15%, this would lead to an annual savings of $1,000, which you could put toward paying down your debt further. A lower interest rate can make a huge difference in how long it takes to become debt-free.
Many people are surprised by how easy it can be to get a rate reduction.
Though this prospect may sound too good to be true, it isn’t. If you can get the right person at the credit card company on the phone, you can often negotiate the APR down to a lower rate. Even better, there is no risk in asking. Unlike some other balance-reduction techniques, such as debt settlement, simply requesting a reduction in your APR does not show up on your , nor does it require hiring a professional to help.
Negotiating With Your Credit Card Company
Take these steps to request a lower interest rate on your credit cards:
- Collect Your Financial Information: Find out your credit score and interest rate. You can order a free annual credit reportif you need to. It helps your case if you have a solid payment history.
- Check for Competitive Offers: Its a good idea to do your homework on competitive offers. If you are getting proposals in the mail that offer a lower rate, thats something to share with your credit card company when you negotiate.
- This number should be on the back of your credit card. The reason you are calling is to request a lower interest rate. The customer service rep should be able to direct you to the proper department. Be sure to ask for their name and direct phone number so you can reach them again if the call gets disconnected.
- Make Your Request: The first point of contact may not have the power to change your interest rates. If they dont, ask to talk to someone who has more authority to make these decisions. Discuss how youve been a good customer and, if you have a stellar payment history, be sure to stress that. Be polite, while still making a good case for why you should receive a lower interest rate. Heres where youd include any competing offer information you have gathered.
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