Understanding Credit Card Interest Rates
Some people think a credit card is free money, but most of us know better—every time you purchase something, you accrue interest on your account. What’s the best way to get ahead without forgoing the things you really need?
What is a good interest rate on a credit card? How do I calculate the interest rate on my credit card? Read on to learn how to avoid interest on a credit card and maximize your savings by using your credit responsibly.
How to Understand Your Credit Card Interest Rate
What is interest on a credit card? It starts with your credit card balance—the amount of charges on your account.
You pay off this balance through monthly installments or in larger chunks when you can afford to do so, as long as your balance leans into the creditor’s court—however, the remainder accrues something called credit card interest.
The amount of interest that accrues depends on your card’s annual percentage rate, or APR. Many things will influence your credit card rate—your credit card company, the type of card you have, the current federal prime rate, and even your credit score when the account was opened.
How Do I Calculate the Interest Rate on My Credit Card?
First, take your APR and divide it by the number of days in a year, 365. After, multiply this value by your average daily balance over a given time.
Multiply this daily value by 30, and you’ll know exactly how much interest you’re paying during one month or another.
What Is a Good Interest Rate on a Credit Card?
Generally, the US prime rate is considered to be middle-of-the-pack for those with excellent credit. On top of this base, your creditor may dole out a lender’s margin if your credit score isn’t ideal.
The sooner you can pay off your credit, the less you’ll need to worry about this figure.
When Are You Charged Interest on a Credit Card?
Do you pay interest on a credit card if you pay it off every month? It’s likely you might avert interest otherwise incurred, depending on your terms of service.
Some credit card companies will uphold a grace period that allows you to spend interest-free if you can pay your debts off in full within a given period of time—21 days is one common window. Still, your own creditor may have a slightly different policy.
How to Avoid Interest on a Credit Card
The simple answer is to pay your credit card off as early as possible. Another would be to avoid using credit.
Clearly, these fixes won’t work in all situations. Here’s how to avoid interest on a credit card while still allowing yourself to use it as needed:
- Pay more than your minimum payment each month
- Take advantage of any interest-free grace periods your creditor may offer
- Always strive to pay your bills on time—The better your credit score, the higher your lending limit, and the lower your APR will be when opening a new credit card account.
It’s not always easy to be the ideal credit candidate—our advice is to minimize spending whenever possible. Save, pay down your debt, and enjoy a freer future.