One of the most important features of a credit card is the interest rate. It affects the cost of carrying a balance on your credit card, a cost you are likely to want or even want to eliminate. Here’s what you need to know and understand about credit card interest so you can better manage your existing credit cards and choose the best credit cards in the future.
How interest pays?
The credit card rate is given as APR. You can find a list of all APRs for a credit card in credit card disclosure. The interest rate currently applied to your balance is on your statement along with each balance.
Most credit cards have a grace period during which you can pay your credit card balance in full and avoid paying interest. Any balance beyond the grace period to the left is calculated in the form of a financing cost.
Financing costs are calculated in a variety of ways depending on your credit card terms. Some credit card companies calculate financing costs based on your average daily credit card balance, the balance at the beginning of the billing cycle, or the balance at the end of the billing cycle. Financing costs may or may not include new purchases on your credit card.
Festivities vs. floating rate
There are two basic types of credit card interest – fixed and variable. Fixed rate may change only under certain circumstances and the credit card issuer must send notice before changing your rate.
Variable interest rates, on the other hand, are tied to a different interest rate (the base rate, for example) and can if the index rate changes. Your credit card issuer does not have to give advance notice if your variable gives rate changes – if the change is the result of an increase in the index rate. The majority of credit card interest rates are variable.
Several different APRs
Your credit card will have different APRs for different types of scales. For example, your card may have an April purchase, April prepayment, and April balance transfer. Each of these interest rates can be different. Your card can also be a April penalty, which will go into effect if you make default on your credit card terms, for example through a late payment.
If you make a payment on a credit card that has different scales with different APRs, the highest April must go to balance any amount above the minimum amount.
Credit cards also have a periodic rate, which is really just another way to get the regular APR information for less than a year. The periodic rate for monthly interest is simply April divided by the number of months in the year, for example 18% / 12 or 1.5%. Regular rates are more often shorter than a month based on a billing cycle. In this case, the periodic rate is calculated as (APR / days in a year) * days in a billing period. The daily rate is another periodic rate calculated by dividing April by the number of days in the year (365 or 366 in a leap year).
If interest rates can increase
Your credit card issuer can only raise your interest rate at certain times: if you default on your credit card terms, the index rate increases, an advertising rate expires, or if changes are made to a debt management plan.
How To Opt Out Of A Rate Increase
When you receive a rate hike notice, you have the right to opt out of the new interest and put your credit card balance on the old price to pay. Your credit card issuer can decide to cancel your credit card if you opt out, but you won’t have to pay the higher interest rate. Opt-out, simply send an opt-out letter to your credit card issuer in the opt-out period.
How to avoid paying interest
With most credit card balances, you can avoid interest by paying the full balance listed on your credit card statement. With certain balances, such as cash advances and balance transfers, it is not so easy to avoid paying interest because these balances do not have a grace period. In this case the best choice is to minimize your interest burden by paying the balance off quickly.
The more you understand your credit card interest rate, the better you can use your credit card to your advantage and save money on interest in the long run.