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  • What is Credit Card Interest & APR?

What is Credit Card Interest & APR?

How does Credit Card Interest affect you?

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Did you know? Credit Card Interest and APR

Did you know?

Most of the time when you open up a new credit line, you will come across terms such as “Interest,” “APR,” and “grace period.” Although they may be new to you, they are important terms that you should fully understand. These terms will directly impact how much you pay over time, how interest is applied to your balance, and how you can avoid unnecessary charges by making timely payments.

Credit Card Interest

Simply put, a credit card’s interest is the price you paid for borrowing money. Lenders use interest as a way to compensate for the risk they take by lending you money. However, it is important to know that interest is only applied towards the balance you carry past your billing cycle. If you pay your balance in full before the due date, you can avoid interest charges entirely. It is important to know that each lender is different, and you may be subject to varying interest rates, fees, and terms.

Interest can be a dangerous game to play. You would want to avoid putting yourself into a hole at all costs. Carrying a high balance and only making minimum payments can lead to rapidly increasing debt due to compounded interest. Compound interest is when your current interest is added to your outstanding balance, and future interest is then calculated based on this new total. This means you end up paying interest on both the original amount borrowed and the accumulated interest. It is best to practice paying your balance off in full.

What is an Annual Percentage Rate (APR)?

An Annual Percentage Rate, also known as APR, is the yearly interest rate charged on borrowed funds. It represents cost of borrowing on an annual basis. For example, let’s say you have a credit card with an APR of 18%. If you carry a balance of $1,000 on your credit card for an entire year without paying it off, the interest you would owe over that year would be approximately $180 (18% of $1,000). It’s important to note that credit card interest is typically calculated on a daily or monthly basis. In this case, the monthly interest would be about $15 ($180 divided by 12 months).

In layman’s terms, the Annual Percentage Rate (APR) is your yearly interest rate.

Grace Periods

A grace period is defined by the Consumer Financial Protection Bureau (CFPB) as “the period between the end of a billing cycle and the date your payment is due.” This period is a representation of the time during which you can pay off your balance in full without incurring interest charges. If you pay your balance within the grace period, you can avoid paying interest on new purchases. It should be noted that it is not a requirement for a lender to provide a grace period, however most do as it is a common ethical practice.

For example, if your billing cycle ends on the 25th of the month and your payment is due by the 15th of the following month, the grace period is the time between these dates.

Promotional Rates

A promotional rate is typically offered to new credit card holders or existing customers as an incentive to open a new account or transfer balances. This lower interest rate, often as low as 0%, applies for a limited time, allowing you to make purchases or transfer balances without incurring regular interest charges. Once the promotional period ends, the standard APR will apply to any remaining balance.

Be weary, lenders often use this marketing tactic as a way to attract new customers by offering temporary low rates, Understanding that most consumers don’t read the fine print, lenders may rely on the fact that many cardholders won’t fully grasp the terms of the promotional rate, using this to their advantage.

Frequently Asked Questions

Frequently Asked Questions: Interest

Credit card interest is the cost of borrowing money using your credit card. If you carry a balance from month to month, interest is charged on the remaining balance, calculated based on your card's Annual Percentage Rate (APR).

The APR is the annual interest rate charged on your credit card balance. It represents the yearly cost of borrowing, and it can vary depending on the credit card type, your creditworthiness, and whether it's a promotional or standard APR.

You can avoid paying interest on new purchases by paying off your credit card balance in full each month before the due date. This allows you to take advantage of the grace period offered by most credit card companies.

A grace period is the time between the end of a billing cycle and the payment due date, during which no interest is charged on new purchases if the full balance is paid off by the due date. Not all credit cards offer a grace period, so it's important to check your card's terms.

Credit card interest is usually calculated on a daily basis using your card's daily periodic rate, which is your APR divided by 365 days. The daily interest is applied to your balance, which can compound if you don’t pay off the balance in full.

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