Interest rates have been on the rise over the last all of 2022 and will most likely continue the upward trend in 2023. If you have credit cards, it’s best to stay educated on how interest gets charged. Stay ahead of potential credit card debt with everything you need to know about credit card interest rates and when it gets charged.
When Is Interest Charged On Your Credit Card
When used responsibly credit cards can be an excellent tool for your budget and purchases. In contrast, wrongful use of a credit card can get you waist-deep in accrued interest, resulting in high credit card debt. Get educated on how your credit card works and when it will be charged with interest to avoid any future credit card debts.
Know The Credit Card Basics
For starters, you should know how a credit card works. A credit is a form of revolving credit. The credit card can be used to make purchases at merchant stores and online by tapping or inserting it into a card reader. Use of the card requires a monthly payment by the due date. Every time the credit card is used, its balance will increase by the transaction dollar amount.
Credit Card Interest Fundamentals
Credit card interest is the cost of borrowing money. In the credit card world, interest is known as the annual percentage rate or APR. In the credit card agreement, you will find your credit card purchase APR. This is the interest rate that will be charged on your purchases. However, there may also be a separate APR for balance transfers and cash advances.
How Is Your Credit Card Interest Calculated?
Interest is accrued when the credit card balance is not paid in full. This means the balance is carried over from month to month, and when that happens, it causes interest to accrue daily based on the Daily Periodic Rate (DPR). To calculate DPR, you must divide the credit card APR by 365 (total days in a year).
You will only have to worry about interest after the typical 21-day grace period has ended. The grace period ends on the due date, which is available on your credit card statement. If the credit card balance is not paid in full on the due date, then interest is accrued. This is how it works for your credit card purchase APR. However, a cash advance typically has a separate APR and is accrued immediately.
Furthermore, balance transfers may also have an APR that differs from the credit card purchase APR. Many times, balance transfers will have a promotional APR period that can last anywhere between 10 to 18 months. However, there are credit cards that may have a low intro APR for balance transfers for longer than 18 months. For example, the Citi® Diamond Preferred® Card and the Citi Simplicity® Card both feature a 0% intro APR for 21 months on balance transfers. After the promo period, interest will be accrued at its regular rate if the balance has not been paid in full.
| How To Avoid Interest | How To Lower Interest |
| Pay the full balance on time | Work on your credit score |
| Establish and stick to a budget | Maintain a perfect payment history |
| Set up auto pay and alerts | Use promo APRs |
The Bottom Line
Ultimately, credit card interest is manageable with the responsible use of a credit card. Work on your credit score to score the best APR’s in the game. Try your best to budget accordingly to not carry a balance on your credit card statement and avoid interest rates piling up on your bill.
Related Article: Federal Reserve Raises Interest Rate Half a Point
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