Do you really understand the interest rates and minimum payments of your credit cards? The financial impact of these terms can be immense, including ending up with lots of personal credit card debt. Understanding how credit card interest works is an important when managing your finances. Learn more about how it all works to save money and manage credit more wisely.
Credit Card Interest Explained
While it may seem like a simple concept, credit card interest rates are anything but simple. Additionally, they are often misunderstood. Here are a few key terms to know about credit cards and interest rates.
Interest rate is essentially a fee paid for the privilege of credit. Measured annually, it is known as the annual percentage rate, or APR. Think APR = Interest Rate. The APR is a measure of the cost of credit, expressed as a yearly rate. It must be disclosed before your account can be activated, and it must appear on your account statements. The card issuer must disclose the “periodic rate.” That’s the rate the issuer applies to your outstanding balance to determine the finance charge for each billing period.
Minimum payments are the lowest amount you must pay on each credit card per month. However, the leftover unpaid balance is charged interest, resulting in a higher payout to the credit card company over time. To avoid this, don’t pay just the minimum payment. Pay the balance in full every month, if you can.
Credit card interest will build and grow every month that you carry over a balance. As this amount compounds, you may find you are drowning in debt. Therefore, credit cards should not be used for emergencies and big purchases that you don’t have the cash to back up. While it can be tempting to just throw it on the card, there are plenty of unforeseen financial hits that creep up unexpectedly, throwing your plans out the window.
Credit Card Interest Insight from Nerd Wallet
Nerd Wallet has some great insight into credit cards and interest rates. Read these excerpts from their article “How Is Credit Card Interest Calculated?”
“If your credit card has an annual percentage rate of, say, 18%, that doesn’t mean you get charged 18% interest once a year. Depending on how you manage your account, your effective interest rate could be higher, or it could be lower. It could even be 0%. That’s because interest is calculated on a daily basis, not annually, and is charged only if you carry debt from month to month.”
“Say you have a $2,000 balance and will have $1,000 to put toward your credit card bill. If you paid $1,000 on the 20th day of a 30-day billing period, your average daily balance would be about $1,633. But if you paid $500 on Day 10 and $500 on Day 20, your average daily balance would be $1,467. You’d reduce your interest charge by about 10%.”
Finally, knowing more about credit cards, interest rates and minimum payments is a great way to manage your finances to avoid consumer debt.
To learn more about your finances and money management, call ACCC today at 800-769-3571 to speak with a certified credit counselor.