With the power of credit cards, you can do more than make purchases. You can also use them to finance a major purchase or consolidate your debt. To do this, you’ll need to pay interest on the money you borrow—sometimes, it can be steep!
What’s in a credit card interest rate?
So what’s the interest rate, and how does credit card interest work? Your credit card interest rate is the percentage of the outstanding balance you pay on your credit card each month. This amount is calculated by dividing the annual percentage rate (APR) by 12, giving you an effective monthly rate (EMR).
“An interest charge on purchases is the interest you are paying on the purchases you make with the credit card but don’t pay in full by the end of the billing cycle in which those purchases were made,” explains SoFi experts.
The APR is one measure of how much it costs to borrow money. It’s based on various factors and may not reflect all possible costs you’ll incur when using your card. The EMR is more straightforward: it simply tells you how much interest charges you’ll incur each month if nothing changes from one month to another.
How is credit card interest calculated?
Credit card interest is calculated as a percentage of your balance. The credit card issuer’s billing statement will typically show how much money you owe, how much interest charges have increased that amount, and your new balance.
The amount of interest charged on a credit card depends on whether it’s calculated monthly or annually. For example, if you have a $10,000 balance on one card with an 18% annual percentage rate (APR), for every year that passes with no change to this balance (other than the average increase in accrued interest), then at year-end your total debt would be $10,903 ($10k + ($1k × 1%)).
How to avoid interest charges on your credit card?
There are a few options to avoid paying interest charges on your credit card. The first is the simplest: pay off your balance in full every month. This ensures that you’ll never be charged interest.
Think about utilising a balance transfer card if you are unable to pay the monthly balance. When you transfer a balance, you move debt with a high interest rate from one credit card to another with a reduced interest rate. You then make payments on both cards until the balance that was transferred is paid off. Additionally, you can inquire with your credit card provider about raising the minimum payment amount or waiving interest fees for late payments.
Ways to avoid interest
- Pay off your balance in full each month. The easiest way is to pay it all off before the due date. This will avoid interest charges and help keep credit card debt from growing out of control. It’s also worth keeping in mind that paying more than just the minimum payment will help prevent further debt accumulation and allow you to pay off your bill faster.
- Use a balance transfer card with a low-interest rate (or no-interest introductory offer). If you have high-interest balances on other credit cards and can’t afford to pay them down immediately, consider transferring them over for an introductory period where there won’t be any interest charges.
- While you may think that the interest rate on a credit card is high, it’s important to remember that it’s also a convenient way to pay off your debt with no hassle.