How is interest calculated on credit cards

When you get a credit card, one of the things you need to be aware of is how interest is calculated. This can be confusing for some people, so we want to take a moment and explain it in detail.

So how is interest calculated on credit cards? The interest on your card is how much of your balance goes unpaid from one bill cycle to the next. The amount you’re charged in interest depends on how much of your balance is left over after all the minimum payments have been made that month.

In this article, I’ll discuss how interest works on credit cards, what you need to know about paying it, and how to avoid paying it.

More on credit card interest

Interest on a credit card is calculated in two ways: daily periodic rate and annual percentage rate. The daily periodic rate is how much interest accumulates on your balance each day, while the annual percentage rate is how much interest accumulates over the course of a year.

One way to think about how interest accumulates on a credit card is by imagining a balance of $1,000. If your annual percentage rate is 10%, that means that your daily periodic rate is 0.0833%. 

Imagine you just make the minimum payment and charge nothing else. We’ll also assume your payment is 1% + interest (which is fairly common to come up with a minimum payment).

At that rate, your balance would be $886.39 at the end of the year. Not bad, right? 

Well, kind of.

You’ve paid $94.38 in interest – meaning you paid $94 just to borrow that money. That might sound like it’s worth it to some people – but trust me, this is a small example and this can spiral quickly.

What if you had a balance of $10,000 instead?

Even more, you’ve only paid off $113.61 of the principal balance. Kind of depressing, right? 

That’s why you should avoid paying interest everywhere possible.

Wait… are you saying I should pay my credit card in full?

Yup.

The reason it makes sense to pay your credit card in full every month is that you don’t want to be paying interest on top of the money you already owe. This can become a costly cycle, and it’s easy to avoid by simply being diligent about paying your balance in full each month.

Paying your credit card in full every month is one of the best ways to avoid paying interest, but there are other things you can do as well. For example, if you know you won’t be able to pay your balance off in full, try to make a larger payment than the minimum amount due. This will help reduce how much interest accumulates on your balance.

And lastly, if you’re ever struggling to make your monthly payments, reach out to your credit card company for help. Many companies are willing to work with their customers to find a payment plan that works best for them.

Can I find cards with lower interest?

Absolutely.

There are a few reasons why you might want to look for a credit card with a low interest rate. For one, it can save you money in the long run. If you have a high-interest credit card, it’s easy to get stuck in a cycle of debt where you’re constantly paying more and more interest.

Another reason to look for a low-interest credit card is that it can help you pay off your debt more quickly. If you’re carrying a balance on a high-interest credit card, most of your monthly payments may go towards interest instead of the actual balance. This can make it difficult to make headway on paying off your debt.

What should I look for?

There are a few things to keep in mind when looking for a low-interest credit card. First, make sure you understand how the interest rate works. Some cards have introductory rates that go up after a certain period, so you’ll want to be aware of that before you apply.

Second, remember that a low interest rate isn’t always the best deal. Sometimes, cards with no annual fee or rewards programs can be a better fit for your needs. So do your research and compare different cards before deciding which one is right for you.

Looks like I’ve already paid a lot in interest – what are my options?

Unfortunately, once you’ve already paid the interest, there’s not much you can do about it. However, you can do things to avoid paying interest in the future.

• Pay your credit card in full every month. This is the best way to avoid paying interest, as you won’t be charged any interest on your balance if you pay it off before the end of the billing cycle.
• Make a larger payment than the minimum amount due. If you can’t pay your balance in full, try to make a larger payment than the minimum amount due. This will help reduce how much interest accumulates on your balance.
• Look for a credit card with a low interest rate. Like I mentioned above, if you’re carrying a balance on a high-interest credit card, it’s crucial to find one with a lower interest rate. This can save you money in the long run and make it easier to pay off your debt.

But what if I just have a lot of debt to pay off?

Okay, if you paid too much interest and that means you just have a bunch of debt to pay off, here are some ideas that don’t involve you delivering food at 2 AM.

First, create a budget and see where you can cut back on your spending. This will help free up some extra money to put towards your debt.

Second, consider transferring your balance to a 0% APR credit card. This will give you a period of time (usually 12-18 months) where you won’t accrue any interest on your balance. Just be sure to make all of your payments on time, as missing a payment could cause the 0% APR offer to be rescinded.

Third, you could also look into consolidating your debt with a personal loan. This can help simplify things by giving you one monthly payment to make instead of multiple payments to different creditors. And like with the 0% APR credit card, you may be able to find a personal loan with a lower interest rate than what you’re currently paying.

Summary

Phew, that was a lot of information! Hopefully, this article helped clear things up for you when it comes to how interest works on credit cards. Just remember, the best way to avoid paying interest is to pay your balance in full every month.

But if you do end up carrying a balance, try to find a card with a low interest rate and make payments that are larger than the minimum amount due. And finally, if you have a lot of debt to pay off, consider creating a budget, transferring your balance to a 0% APR card, or consolidating your debt with a personal loan.