If you’re like most people, you have one or more credit cards that you use for purchases when you need extra money or you’re looking to rack up some rewards. You may know what your interest rate is. But, it can be challenging to actually sit down and determine how it affects your purchases.
What is Credit Card Interest?
When you receive a new credit card, you’ll have a specific interest rate that the credit card company will charge when you carry over a balance. Interest is simply the credit card company’s way of making money on the money that you borrow from them. Interest rates are typically expressed in APR or annual percentage rate format. According to the experts at SoFi, “Often, the better your score, the lower your interest rate.”
Will Every Purchase Be Charged Interest?
One area that confuses many new credit card users is what purchases they will be charged interest on. It’s essential to think of interest as only being charged on a total balance, not individual purchases. Let’s say that you make multiple purchases this month that total up to $550. You will receive a billing statement for the $550 along with the due date from your credit card company.
If you pay the entire $550 before or on the due date, you won’t be charged interest on the amount. However, if you pay the minimum payment and carry over the balance into the next month, you will be paying interest on the balance.
How Can I Calculate My Credit Card Interest?
If you’re thinking of carrying over a balance on your credit card, you’ll want to know what you’re going to be charged in interest for doing so. Calculating credit card interest can be done in a number of different ways. It’s crucial that you read your credit card agreement so that you understand how your credit card provider calculates the interest amount on your account. Some will calculate interest charges based on your average daily credit card balance, while others may use the balance at the beginning of your billing cycle to calculate the interest owed.
Fixed vs. Variable Interest Rates
Credit card companies will charge either a fixed interest rate or a variable one. A fixed-rate means that you’ll have the same interest rate for every billing statement. The only way your interest rate can change is if certain circumstances specified in your credit card contract are met, and your credit card issuer sends you advanced notice of the change. Variable interest rates change depending on what the prime rate is for credit cards. This rate can change each billing cycle, and your credit card issuer doesn’t have to send you any advance notification about the rate change.
Interest is one of the most crucial factors that you’ll need to consider when determining which credit cards you want to get. You should understand how it works so that you know how much you can expect to be charged when carrying over a balance on one of your credit cards.