3/15/2018
Understanding your Credit Interest
Credit Cards are not free, and can cost you a lot of money if you are not paying attention.
Credit cards are beneficial in so many ways. They provide the ability to buy now and pay later, which is a huge benefit should you find yourself in an emergency situation. They offer more protection than using cash and have security features if your card gets lost or stolen. Credit cards, when used responsibly, are also one of the most effective ways to build and maintain your credit score. With all of these advantages, it is often easy to overlook the major disadvantage of credit cards, which is of course, the interest charge. Yes, it is true… these wonderful little plastic things are not free, and can cost you a lot of money if you are not paying attention. Understanding how your credit card interest works will help you best avoid credit pitfalls.
How to calculate interest rate
The first step is finding out what your interest rate is on your credit card. This number should be listed on your credit card statement as your APR, or your Annual Percentage Rate.
Creditors charge interest on a daily basis, so you need to convert your APR into a daily percentage rate. You can do that by dividing your APR by the 365 days in a year.
For example, let's say your APR is 15%. To calculate the daily interest you would divide 15% by 365 to get .041% (.15/365 = .00041)
You would then multiply your balance by .041%. So if your balance on your credit card is $5,000, then your daily interest charge is $2.05 (5,000*.00041 = 2.05).
Since your balance may change from day to day, most creditors use the average daily balance method to calculate the interest charge for the billing cycle. This means that they will calculate how long you held each balance during the billing cycle and calculate an average number. So if you charge more, the rate will slightly increase and if you make a payment before the billing due date, the rate will slightly decrease.
While the process may seem complicated, the bottom line is that you are paying money every day you hold a balance on your credit card and the interest is compounding. It's no wonder paying off credit card debt seems like it takes an eternity!
Read More: Understanding Compound Interest
How to avoid paying interest
The easiest way to avoid paying interest is not using credit cards at all, but with so many advantages of having them, this is often not the best option. The good news is most creditors have a grace period in which no interest will be charged if the balance is paid in full by or before the payment is due. So you can use your credit card monthly and as long as you pay off the balance entirely by the due date you will not accrue any interest charges and will be able to best take advantage of all the perks of having a credit card.
For those with balances too high to be paid off in full at once, to minimize accumulated interest charges, your first step would be to stop using the card entirely as each charge will become more and more expensive. Next, you want to be sure you are paying more than the minimum payment each month. You may also consider making multiple payments each month which will lower your average daily balance, resulting in a small savings in interest charges.
And for those of you who feel doomed to a life of minimum payments, there is hope! Navicore Solutions' Credit Counselors are here to help you figure out the best plan for you to get out of debt as quickly as possible. The first step is reaching out, and the sooner you call, the more you will save! So call a counselor today at 1-800-992-4557.
Add your email to get more personal financial education
Lauren Lovett has been with Navicore Solutions for over 10 years serving as a Certified Credit Counselor, and currently as the Grants Manager. While in these roles, she has witnessed the positive impact that the organization’s counseling services has on improving the money management skills and housing security of individuals and families in need.
Go Back
FAQs
An annual percentage rate (APR) of 24% indicates that if you carry a balance on a credit card for a full year, the balance will increase by approximately 24% due to accrued interest. For instance, if you maintain a $1,000 balance throughout the year, the interest accrued would amount to around $240.00.
What is a good credit interest rate? ›
Average Credit Card Interest Rates by Category
| Category | Latest Average | Q1 2024 |
|---|
| Excellent Credit | 18.05% | 18.04% |
| Good Credit | 24.14% | 24.12% |
| Fair Credit | 26.66% | 26.41% |
| Store Cards | 30.41% | 30.16% |
5 more rowsCredit card interest works by charging you for the amount of money you borrow when you make a purchase with your card. If you don't pay off your balance in full by the due date, you will be charged interest on the remaining balance.
Is 29.99 APR high? ›
Penalty APRs are part of why credit card overspending can be so dangerous, as they may reach higher than 29.99% when a payment is at least 60 days late. Interest rates this high would be unthinkable in most other common lending contexts.
Is a 26.99 APR good or bad? ›
No, a 26.99% APR is a high interest rate. Credit card interest rates are often based on your creditworthiness. If you're paying 26.99%, you should work on improving your credit score to qualify for a lower interest rate.
Do I pay APR if I pay on time? ›
The bottom line on APR
Remember that APR is only applied if you're carrying an outstanding balance on your card. You can typically avoid paying any interest charges if you pay off your card balance before the statement period ends each month. Selecting the right credit card shouldn't be complicated.
How much interest will I pay with a 700 credit score? ›
How do I get my APR lowered? ›
How can I lower my credit card APR?
- Improve your credit score. An improvement in your credit score is critical if you want to start reducing the APR you're being offered by lenders on credit card applications. ...
- Consider a balance transfer. ...
- Pay off your balance. ...
- Learn your credit issuer's policy.
Factors that increase your APR may include federal rate increases or a drop in your credit score. By identifying changes to your APR and understanding the actions that led to your increased rate, you can take steps that may help reduce your interest charges in the future.
Is it bad to max out a credit card and pay it off immediately? ›
The main problem is your utilization
Maxing out your credit card worsens your utilization ratio. Depending on the severity of the change, this could hurt your credit score. Your utilization ratio makes up 30% of your FICO® Score.
Bottom line. If you have a credit card balance, it's typically best to pay it off in full if you can. Carrying a balance can lead to expensive interest charges and growing debt.
Is it good to use a credit card then paying immediately? ›
By paying your debt shortly after it's charged, you can help prevent your credit utilization rate from rising above the preferred 30% mark and improve your chances of increasing your credit scores. Paying early can also help you avoid late fees and additional interest charges on any balance you would otherwise carry.
How high is too high for an APR? ›
A good credit card APR is a rate that's at or below the national average, which currently sits above 20 percent. While there are credit cards with APRs below 10 percent, they are most often found at credit unions or small local banks. If you don't have good credit, you're likely to receive a higher credit card APR.
What is a fair APR rate? ›
It depends on the type of card you're looking at, as well as your own credit. A credit card APR below 10% is definitely good, but you may have to go to a local bank or credit union to find it. The Federal Reserve tracks credit card interest rates, and an APR below the average would also be considered good.
How do I calculate my interest charge on my credit card? ›
For example, if you currently owe $500 on your credit card throughout the month and your current APR is 17.99%, you can calculate your monthly interest rate by dividing the 17.99% by 12, which is approximately 1.49%. Then multiply $500 x 0.0149 for an amount of $7.45 each month.
Is APR of 24% high? ›
Generally, an APR below 21% is relatively low. Anything over 24% is more expensive. If you pay off your credit card balance in full every month, the APR won't be as important as you won't be paying interest. But if you forget and the APR is high, the interest charges will quickly rack up.
Is 24.99% a good APR for credit card? ›
That means getting a credit card with an APR lower than 23% could be considered a good APR for the average borrower.
Is 24% APR 2% a month? ›
If you have a credit card with a 24% APR, that's the rate you're charged over 12 months, which comes out to 2% per month. Since months vary in length, credit cards break down APR even further into a daily periodic rate (DPR). It's the APR divided by 365, which would be 0.065% per day for a card with 24% APR.
Is APR charged monthly? ›
The APR on a credit card is an annualized percentage rate that is applied monthly. If the advertised APR on a credit card is 19%, for example, then an interest rate of 1.58% will be imposed on the outstanding balance each month. As mentioned, any given credit card may come with several different APRs attached.
