Everything you need to know about credit card interest

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NEW YORK – March 8, 2022 – (Newswire.com)

iQuanti: I wonder how credit card interest works? Interest is essentially the cost of a loan.

Credit cards allow you to borrow money flexibly and pay it back later. However, for most credit cards, your issuer will charge you interest if you don’t pay your balance in full by a specific due date.

Beyond that, some cards have multiple interest rates, which can be confusing.

The article below will help clear up some confusion by explaining the basics of credit card interest.

How credit card interest works

Interest on credit cards is expressed in annual percentage rate of charge (APR). The lender divides the APR by 365 to get a daily interest rate.

For example, if your APR is 16%, your daily rate would be 0.044%. Your lender multiplies this amount by your balance each day for the entire billing period to calculate your interest amount. So if your balance was $1,000 on day one, you will be charged $0.44. The next day, they would multiply 0.044% by $1,000.44 and add it to the balance to get $1,000.88.

Now your lender adds this interest to your balance. This is called interest capitalization.

However, they won’t in fact add interest every day. That’s just how they calculate it. They will capitalize the interest after the due date has passed and you will still have a balance.

Variable or fixed APR

Variable APRs fluctuate with the prime rate – a universal factor that influences financial institutions at all levels. The Federal Reserve sets the prime rate and the banks set the APR and APY in response.

Fixed APRs do not fluctuate at all. Once you get your card, it stays at that APR.

Most cards are variable these days, although some fixed APR cards do exist.

Types of APR

Credit cards can accumulate balances from several sources, such as purchases, balance transfers and cash advances.

Most card issuers charge different APRs depending on where this balance is coming from. You can find all APR information in the terms and conditions of your card.

Here are some of the main types of APR:

Purchase APR

This is the regular APR you are charged for credit card purchases.

APR balance transfer

If you are transferring a balance from another credit card, you will be charged this APR on that balance.

APR cash advances

If you take out a cash advance, you will be subject to a cash advance APR. These tend to be significantly higher than buy APRs.

Introductory APR

Many cards offer low or 0% introductory APRs for purchases and/or balance transfers to encourage new card applicants. These APRs typically last 12 to 18 months, after which they revert to their regular APRs.

APR Penalty

If you are late or miss a payment, card companies will impose a higher APR penalty. You may also lose any 0% introductory APR you currently have and suffer credit damage.

However, the CARD Act of 2009 legally requires issuers to reinstate your regular APR if you make payments on time for six months immediately after receiving the penalty APR.

Credit Card Interest Explained

Ultimately, credit card interest is the cost of borrowing from your lender. There are many types, and it can be fixed or variable.

But ideally, you never pay interest in the first place by paying off your full statement balance each month. By doing so, you will avoid wasting money on interest and worry about all the details surrounding your interest rate.

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Everything you need to know about credit card interest

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