Credit Card Interest Rates Explained
Credit card companies make money in various ways. In addition to charging fees, the companies also charge some interest on money lent to people. Unlike fees, the interest charged on credit card debt varies from card to card and from person to person. Likewise, the interest charged depends on a number of factors, including the amount borrowed and the credit scores.
Similarly, any amount of money borrowed from a credit card company is subject to a standard interest -rate dubbed the Annual Percentage Rate (APR). The APR is usually expressed in percentage per year. However, it is also used to calculate the charges that one must pay monthly for holding a given debt.
How Is APR Calculated?
While APR measures interest charged on a credit card debt over a year, the rate is usually used on shorter periods. For instance, to determine the amount of money you are required to pay daily on a credit card debt, simply convert the APR rate to a daily percentage rate. Do so by dividing the APR by 365 days, the number of days in a year.
To find the amount of money due in interest, simply multiply the daily APR by the credit card debt. The daily charge is then added to the total balance to determine the entire credit card debt.
Assume a credit card comes with an APR of 15%; its daily rate, in this case, will be 15/365 = 0.041%. Assume a $2,000 credit card debt at the 15% APR, the next day interest to be added to the total debt will be 0.041% x 2000= 0.82 + 2000= $2,000.82.
The process will continue daily until the end of the month. At the end of the month, the total debt will have risen significantly considering the impact of compounding.
When is credit card interest incurred?
Credit card interest is incurred whenever one uses the amount of money allocated by the credit card company. In this case, if you pay for anything using a credit card. The same amounts to debt which must incur the APR.
In addition, most credit issuers offer interest-free periods on whatever one bought using the credit card. The zero interest rate is usually applicable whenever one pays off the bill in full. Failure to pay the debt in full often results in interest being backdated back to the purchase date.
Types of Credit Card interest rates
Credit card companies charge different types of interest rates depending on the transactions carried out using the card. The interest charged will often depend on the value of the purchases made, often referred to as the purchase rate. However, if you pay the balance on time and in full, you may be eligible for a zero-interest charge.
Similarly, withdrawal of credit card money often incurs a much higher interest rate as compared to using the cash straight from the card to make purchases. The interest charged might be much higher regardless of one paying the debt in full and on time.
Interest on a credit card will often differ upon transferring credit card debt from one card to another. It is common for some providers to charge 0% interest on transferring debt from one card to another. In this case there will be no interest on the credit card debt.
Some credit card companies are also known to charge multiple interest rates on a single card. For instance, there may be an interest rate for purchases and a completely different interest rate on cash advances.
Just because you are eligible for a credit card does not mean you are eligible for the advertised interest. Some providers are known to offer tiered interest rates as opposed to single APR. In this case, if you have poor credit scores, you might end up getting a much higher APR. Similarly, if you have high credit scores, you might end up getting a low APR.
How Credit Card Interest Fluctuates
There are laid out procedures that credit card companies must follow before altering the APR of the underlying debt. By law, they are required to contact the debt holder for at least 30 days before making any changes. The time period accords the borrower, ample time to decide what to do.
In case of a hike, one is usually given a 60 day grace period to reject the hike. During this period, one can pay back the debt at the initial rate, failure to which can result in the hiking of the rate.
The Best Interest Rate on a credit card
Interest rates vary widely, one of the reasons why it is important to shop around. The best c interest rate will often come down to the borrowers, credit score, the higher the score, the much lower APR one is likely to be subjected to. Higher credit scores are often associated with less risk by borrowers.