When Do Credit Cards Charge Interest?

When Do Credit Cards Charge Interest?

It is common knowledge that credit card debt accumulates due to several factors – one of which is the buildup of interest charges. But these charges do not apply to your credit card accounts for no reason; most of the time the card user has caused it.

One way of managing your credit card successfully is by knowing how interest rates work and how they are applied to your account. 


Your Credit Score Has a Big Impact on Your Credit Card Interest 

When you apply for a credit card, don’t think right away that you will be getting the attractive advertised rate of that card. Your annual percentage rate or APR, upon your approval, will depend on your credit score.

It’s customary that credit card issuers advertise a range of potential interest rates on their products that ranges from 13.99% to 22.99%. Cashback and rewards credit cards are packaged uniquely to attract your business, but they often have higher rates so be sure that the benefits outweigh the risks of paying more for interest. 

Banks and credit card issuers set the interest rates on your credit card based on the risk you pose in their credit analysis. Among their concerns is your ability to repay, which is determined by studying your debt-to-income ratio. It’s possible that even if you carry a variety of credit card products, you’ll notice that they differ in interest rates. 

Below is a simple illustration of how credit card interest rates differ depending on your credit score. 

Credit Score Category Effective Interest Rate 
Deep Subprime (579 or lower) 21.0%
Subprime (580 – 619) 20.5%
Near Prime (620 – 659) 19.0%
Prime (660 – 719) 16.5%
Super Prime (720 or greater) 13.5%
Overall  15.6%


Fixed, Variable and Promotional Rates

When determining the best credit cards to apply for, you need to understand how cards vary depending on the type of annual percentage rates they carry. 

credit card interest rates

Fixed-Rate Card

Probably the most basic of all credit cards are those that come with a fixed rate; it’s straightforward and simple. But offers of fixed-rate credit cards are set within a time period only. Issuers set their own terms and factors on how and when their rates would change to a new one and for another set of time. When you apply for such a card, the issuer has to tell you how long the rate will remain fixed. They are also required to provide you a 45-day notice when the rate change to give you time to decide to continue using the card or change to a newer, lower rate card.

Variable Rate Card

Variable-rate cards have their interest rates go up or down in the direction of the prime interest rates. They use indexes such as U.S. Treasury Bills and Federal Reserve Discount Rate, among others, as their benchmarks. Because the variability of the interest rate at any given time is inherent to the product, issuers of this card are not obliged to send rate change notice to their borrowers.

Promotional Interest Rates

Credit cards with promotional rates work like fixed-rate cards – the rates are fixed for a specified promotional period. Some of these cards have promotional interest rates tied to other forms of bonuses, such as cash or discount coupons, when you make a specific amount of purchase.


What are The Other Types of Credit Card APRs, and When are They Charged? 

Like most credit card users, you may only be aware of your regular APR, or commonly known as purchase APR. When you pay off your purchase amount in full at the end of each billing cycle, this interest will not apply. When you pay only a portion of your outstanding balance, purchase APR will be charged on your unpaid amount.

However, when you start to make different transactions or mismanage your account altogether, you’ll be charged a different set of rates.

Cash Advance APR

Because your card also comes with a cash advance feature, it’s possible that at any point in time, you will draw some cash from your account. For this transaction, considered by your lenders as cash loans, you will be charged an interest that is higher than your purchase APR. The average balance transfer APR is at 23.68%. Likewise, there is also a fee that is charged each time you make a cash advance –  $10 or 5% of the withdrawn amount whichever is higher.

Interest rates for credit cards

Balance Transfer APR 

If you are transferring a balance from one of your cards to another, then a balance transfer APR would apply along with a fee that is at least 3% to  5% of the transferred amount 

Penalty APR

Penalty APR is considered to be the highest APR that an issuer can apply to your account. Penalty APR that is at least 29.99% is applied to your outstanding balance when you have missed paying your balance for more than 60 days. This APR is kept enforced for 6 months of continuous on-time payments.


Can I Dispute For Charges Applied on My Card?

A person should always take full responsibility in monitoring your credit card statement of account because billing errors are typical and may cost you more interest money later on. Once you have established that error is present, you have to send a dispute letter to your creditor within 60 days, and the law requires them to respond to you.

Here are some of the possible billing errors that can happen to your account:

  • Charges that list the wrong date or amount
  • Charges for goods and services you didn’t accept or that weren’t delivered as agreed
  • Mathematical errors
  • Failure to post payments and other credits, like returns
  • Failure to send bills to your current address — assuming the creditor has your change of address, in writing, at least 20 days before the billing period ends
  • Charges for which you ask for an explanation or written proof of purchase, along with a claimed error or request for clarification


How Can I Avoid Paying Interest on My Credit Card?

The only way to avoid paying interest on your credit card is to pay off your balance every month. But this is always easier said than done, and it only happens when you have regular money coming in to pay off what you have purchased a month earlier. The moment you leave a balance unpaid, that amount plus new purchases you’ve made will begin to incur interest charges.

You may, however, work on lowering your interest charges by:

  • Knowing your credit terms. Even if all credit cards generally have the same terms, they still have some differences depending on how they package their product. Knowing what factors are involved in charging fees and high interest will help you avoid them as you use the card.
  • Improving your credit score. By taking actions on ways to improve your score, you’ll have higher chances of bargaining for a lower interest rate on your credit card.
  • Paying your bills on time. Paying your bills on time and more than the minimum amount due will lessen the amount of your outstanding balance. This means less money added to your balance as interest charges.
  • Avoiding unnecessary cash advances on your credit card. The balance transfer APR is 8% higher than your purchase APR. This rate will apply until you have fully paid your cash advance amount.
  • Stick to a spending budget. Mindless spending using your credit cards will likely bring you to risk of default. 

Unless you’re diligent in paying your credit card balance in full each month, then you don’t have to worry about mounting interest charges. But like most people that carry a balance on their cards, paying for interest is longer avoidable. Interest charges are your bank’s or creditor’s way of balancing the risks that come with each credit card use. You, on the other hand, can avoid debt accumulation due to interest rates when you use your card responsibly.

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How Do Credit Card Companies Calculate Interest?

How Do Credit Card Companies Calculate Interest?

Is it time to celebrate? Did you just get your first credit card and now you’re wondering how the interest will work? Or have you been using credit cards for a while and starting to wonder why your balance never seems to go down even though you’re making your minimum monthly payment on time every time? Credit cards can come chocked full of different fees and terms, and even interest rates. Interest rates can be fixed or variable, or even temporarily fixed for a short amount of time before switching to a variable. They can change on what seems like a drop of a dime, or depending on your spending, and payment behavior. 

Credit cards can be really confusing, especially if you’re new to the line of credit game. The majority of credit card companies are sure to put all of the details explaining your card in detail deep in the fine print. For any card you have currently or considering applying for, it’s best to make sure you know the terms the card company is offering inside and out. But if you can’t do that, or just don’t have the time, there are a few minimal pieces of credit card knowledge you should stock your brain with. 

The most important of these pieces of knowledge, perhaps, is knowing how credit card interest works in terms of billing cycles and compounding methods. Most people have credit cards, and at least half of credit card owners carry a balance which is subject to interest. Credit card interest is spoken of in terms of APR (Annual Percentage Rate). The interest rate can vary from card to card and from time to time. And they definitely vary from person to person based on each person’s credit score. 

Calculating Interest

APRs are identified in terms of a year. But your daily interest rate is a different number. To find out what you’re paying each day in terms of interest, simply divide the APR by 365 days. So if your card carries a 14.95% APR, divide 14.95 by 365 and you see that you are paying 0.0409589% interest on a daily basis. So if you carry a balance on one day of $495, the interest the credit card company will charge you for that day is $495 x 0.0409589% (or 0.000409589), which is $00.20. 

Compounding Interest

The next day, provided you haven’t made any new purchases or payments, your balance will be $495.20. At the end of the day, interest is calculated again but, this time it’s calculated against the new balance. So, $495.20 is multiplied by 0.0409589% or 0.000409589. Interest for this day comes to 20 more cents. Your total balance for this day is now $495.40. The following day, 20 more cents is added to bring your balance up to $495.60.

New Charges

What if you make a $2000 purchase on your card, bringing the balance up to $2495.60? What would be the interest at the end of the day you made this big purchase? The same rules apply. Interest is calculated daily regardless of the balance. The credit card will multiply your balance of $2495.60 by 0.000409589 which is $1.02. 

Your balance at the end of the day will be $2496.62. If you make no new charges and you have, let’s say, 10 days left in your billing cycle then, you’ll be charged $10.22 in interest more before your next payment is due, bringing your total balance to 2506.84. You’ve made $2495.00 worth of purchases and generated $11.84 in interest for the credit card company over a 14-day period. 

interest rates percentages

Variability In Interest Rate

Each card is unique. Some may come with very straightforward APRs, while others may offer one APR for purchases and another for balance transfers and cash advances. 

Many card companies offer introductory APRs for terms of six months, a year, or other predetermined time periods. Then the APR adjusts after that period is over. If you do apply for a card of this nature, just make sure you know what the APR is after the introductory term expires. 

Grace Periods

Some credit card companies do offer grace periods for a certain amount of time for each billing cycle. If you pay off your balance in its entirety each billing cycle before the grace period expires (usually by the payment due date), the credit card company will not charge you interest for that billing period. If you don’t pay your balance off in full, then the interest charges will appear during the next billing cycle. Not all credit card companies offer grace periods, so make sure to read the fine print of any credit card offer you receive. 

Variable Rates

Credit cards often come in the form of variable rates. These variable rates fluctuate at a certain number of percentage points above prime. The prime rate is based on the federal funds rate, plus three additional points. Because the federal funds rate can fluctuate, your variable rate will fluctuate too. So just make sure if you are considering a card with a variable rate, the terms of the rate are something you are prepared to deal with financially. 

The Minimum Payment

Credit card companies offer very low minimum payments for a reason. The less you pay off each month the more interest rate a credit card carrier can let accumulate in your account. While it may be saving your budget month to month to pay just the minimum balance, in the long run, you end up paying much more when you finally do end up paying off what you owe. 

Also, your credit rating is done no favors by only paying the minimum each month. As your debt to credit ratio tightens, your credit score will begin to go down. That’s because a significant portion of your credit rating is based on the comparison of how much debt you owe to how much credit you have available. Paying off your balance is your surest bet to maintaining a high credit rating and paying minimal interest month to month.

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