*Editorial Note: This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.
This article was last updated Oct 09, 2014, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.
Understanding Credit Card Interest
The Consumer Financial Protection Bureau (CFPB) collected 30,000 complaints last year with many of them related to credit cards and debt complaints. With the average interest rate for credit cards currently at 15%, it’s more important than ever to understand how interest rate is calculated and how to avoid over-paying in interest charges.
Our newest infographic, Understanding Credit Card Interest, explains how people can save money by simply having a better understanding of how their credit card interest is calculated. We see interest as a game of strategy, not chance!
How Interest is Calculated
There are two main components to understand if you want to truly know how your interest rate (or APR) is determined; the average daily balance and the periodic interest rate. Your average daily balance is the total unpaid balance at the end of every day divided by the number of days in a billing cycle. The periodic interest rate is your APR divided by the number of days in a year.
Let’s say your total balance is $1,000 and you’re paying a periodic interest rate of .000411% (15% APR / 365). Your minimum interest payments for the month will be $12.30 (periodic interest rate x total balance x number of days in a month).
Pay Early, Pay Often
To better understand how interest is calculated, you definitely need to understand the grace period. Credit cards come with a statement close date, statement due date and a grace period. The grace period is the number of days (usually between 20-30 days) you have to pay your bill without being charged interest.
The grace period is between the statement close date and the statement due date. If the balance is not paid in full by the due date, you are then charged interest on all the purchases made during that time period. The trick is to make payments early before the end of your grace period. This will save you from being charged any interest on your purchases.
Hello Mr. Money Bags
Saving money by not paying interest just means more money in your pocket. Nobody likes the feeling that they’re throwing money away, so why do it if you don’t have to. Paying interest every month is the same thing as throwing away money., and you don’t have to pay the interest if you just spend a little extra time understanding how interest works. The smartest way to use your credit card is to make a purchase then turn around and pay it off as quickly as you can. Even if it’s before your due date, that’s ok! Remember, the trick is to pay your balance early, and make payments often.
Less interest = more cash! Now let’s go have some fun working our way through our monopoly game-like infographic that can give you all the tricks to avoid paying interest when you really don’t have to!