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How to Calculate and Understand Credit Card Interest

Credit card debt is a crushing reality for anyone that doesn’t pay their credit card balance from month to month. Fortunately, knowing what interest charges are and how credit card interest is calculated can give you the knowledge to get out of debt faster. Here is everything you need to know about credit card interest – and how to avoid paying it.

How Credit Card Interest Works

Credit card interest is more than a monthly line item in your statement or a number printed on the credit card issuer envelopes you still receive via snail mail. Quite simply, it is the fee that you pay for the ability to borrow money. This interest rate is known as an annual percentage rate or APR.

Credit card issuers make a significant portion of their profits through interest payments. Suppose you carry a balance on your credit card. In that case, you can anticipate paying extra in addition to your overall purchase prices.

Credit card issuers calculate the interest you owe by multiplying the daily interest rate and adding it to your balance. This daily interest rate is your annual APR divided by the number of days in the year (365 in most cases).

Here is a quick example to demonstrate how to calculate your daily interest rate:

  • Credit card APR: 15%
  • Current balance: $500

Let’s say your current balance on your credit card is $500, and that card features a 15% APR on purchases. If you divide that 15% by 365, you’ll get a daily interest rate of 0.041%. This means that an outstanding balance of $500 would accrue $0.20 in interest every day. Should the balance remain the same for the whole billing period, you would owe $6.15 in interest at the end of the month, for a grand total of $506.15 owed.

How to Avoid Paying Interest

The easiest way to avoid paying interest is by paying your statement balance in full each month. Paying the full statement balance means avoiding interest, reducing your overall credit utilization, and ensuring your payments are never late or missed.
When Should You Pay Your Credit Card Statement?

It would help if you always tried to pay your credit card by the due date every month. Most cardholders do this, but you can help your credit by paying your bill earlier in some instances.

Understanding when to pay your credit card bill requires a brief explanation of the credit card billing cycle. The credit card billing cycle encompasses the statement date, the due date, and the reporting date.

  • Statement Date: The statement date is the day your card issuer compiles all your transactions for the billing period and provides them to you in a statement. All purchases before this date are on your credit card bill, with all others occurring after that date posted to the next statement date.
  • Due Date: The due date on your credit card is the day you must pay at least your minimum amount due. The due date is typically three weeks after the statement balance posts.
  • Reporting Date: The reporting date is the final date in the statement cycle and refers to the day your bank reports to the major credit bureaus.This date may not be after your statement closes – in fact, it might be any time, so always ask your bank when they report to the major bureaus.

What is a Good APR for a Credit Card?

Interest rates on credit cards can vary significantly, depending on several factors:

  • Credit score and history
  • Is the credit card from a bank or a credit union?
  • Personal banking history with the card issuer
  • Does the credit card offer rewards?

Typically, the better your credit score, the lower your APR. Here are the current average APRs based on credit score:

Excellent Credit 13.2%
Good Credit 19%
Average Credit 24.5%
Bad Credit 23.1%
No Credit 21.8%

Because credit card APR can vary so widely, shopping around for the best credit cards is always advisable before applying. The easiest way to understand what interest rate you can expect is by searching for credit cards within your credit score profile. Keep in mind that the free annual credit report you receive at AnnualCreditReport.com does not provide a score, just your credit file.

How to Reduce Existing Credit Card Debt

Suppose you are concerned about your credit card balances and accruing too much interest. In that case, one solution is to consider a balance transfer credit card. Many of the best balance transfer cards feature promotional 0% intro APR periods of between six to 18 months. Introductory APR periods can halt further interest charges and help you pay down your current balances faster.

Here are the current longest 0% introductory APR periods on credit cards from the leading banks:

Credit Card Purchase Intro APR Balance Transfer Intro APR

Citi Simplicity® Card
0% for 12 months on Purchases 0% for 21 months on Balance Transfers

Citi® Diamond Preferred® Card
0% for 12 months on Purchases 0% for 21 months on Balance Transfers

Chase Slate Edge
0% for the first 18 months from account opening date 0% for the first 18 months from account opening date

U.S. Bank Visa® Platinum Card
0% for 20 months from account opening date 0% for 20 months on balances transferred within 60 days from account opening

Wells Fargo Reflect Card
0% for 18 months, potential extension of up to 3 months for meeting minimum requirements 0% for 18 months, potential extension of up to 3 months for meeting minimum requirements

Conclusion

Interest is just the fee for the ability to borrow money, like the rent you pay to live in an apartment someone else owns or the charge for getting a ride downtown in someone else’s vehicle. It’s money you pay for convenience’s sake, though the overlying problem still exists.

Suppose you only make a minimum payment each month over the years. In that case, you may very well end up paying more in interest than the initial amount owed.

Irresponsible behavior (like not making your monthly payments on time) can also affect your credit scores, affecting things like the APR of cards you apply for in the future and even which ones you may qualify. If you can pay your credit card balance on time, every time, do it. You’ll be saving cash that can be used for more exciting aspects of life than interest.

Related Article: Balance Transfer Basics

Featured image by stevepb/Pixabay
About: Cory
Cory Santos

Cory is BestCards.com's "Jack of all trades" and resident credit expert, covering all facets of the credit card space. Cory holds academic degrees in both the U.S. and U.K. In addition to credit cards, Cory finds that jogging, cats, and memes are essential parts of a balanced day.

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