Do you ever wonder how even after you’ve paid for the minimum amount due on your credit card it seems that your payment didn’t make a dent on the outstanding balance?
You keep paying this certain amount but it only seems to reduce your debt to very minimal, almost unfelt levels. Chances are, you did not do your homework because you neglected one important piece of information and that is your credit card’s interest. So what is credit card interest and how do you avoid wasting more money for it? The answers to these questions are given below.
Credit Card Interest
If you ever wonder how credit card issuers earn, then the answer is short and sweet. It’s through interest. This is also the amount banks charge you with over the time money remains borrowed. It is also known as the annual cost of borrowing money. A key information you need to remember is your APR or annual percentage rate because it will determine the amount of interest rate you will be facing for not paying your debt in a timely manner
How Does One Accrue Credit Card Interest?
Your credit card debt will incur interest in the event that you fail to pay the exact amount you owe within the time frame you were given.
Say for example you purchased a flat screen TV for $500. You are usually given around 21 days grace period for you to settle that same amount for it to not incur interest so if you do (or not do) one of the following, additional interest or charge will reflect on next month’s credit card bill.
- Pay within the given period
- Not pay the full amount within the period mentioned
So be aware and know how a credit card works before using it because not knowing means disaster and further debt on your part.
How is Credit Card Interest Calculated?
In order for you to accurately calculate or compute interest, it’s important to know what your card’s APR (annual percentage rate) is although most credit card companies don’t charge interest to your account annually as the name implies but daily, thus the term daily periodic rate or DPR.
So how do you determine your card’s DPR? Simply divide the APR by the number of days in a year or 365. If your APR, for example, is at 11%. Just divide that number by 365 to get your DPR value which is 0.03% at this point.
How about if you made additional purchases even before the grace period ended? How does the bank determine your average daily balance? The bank multiplies each balance by the number of days you carried them, combine them, and then divide them by total number of days per month. Is that confusing? Perhaps we can show you using actual figures.
Say you have an outstanding debt of $500 at the start of the month. Fifteen days after the new billing period begins you decided to treat yourself by using your credit card to purchase a top-of-the-line Blu-ray player that cost you another 500 bucks.
Here’s how it should look like:
($500 * 15 days) + ($1,000 * 15 days) = $22,500/30 days = $750 ADR
$750 * 0.0003 * 30 days = $6.75
The point is to pay off the entire amount of your debt within the cut-off or grace period provided by your bank. If any of these conditions aren’t met, don’t be surprised to find that your debt didn’t lessen the way you expected it to because interest was added for the unpaid debt.
How Can You Avoid Interest from Piling Up?
It’s really simple. Pay the money you borrowed immediately. That’s it! Paying the minimum amount won’t help much and in most cases, will just get you into deeper debt (unless you stop buying more stuff) and prolong the agony, so to speak.
Owning a credit card is a HUGE responsibility. You got to have discipline and need to be diligent in learning how it works and what kind of actions will incur additional costs so you don’t get surprised every month when opening your credit card bill.
Is a passionate adviser at Marketunlimited who loves recommending/giving advice on Credit Card related problems.
My life is concerned with consumers searching for information on utilizing their credit cards. So I possess a strong will to help consumers search the internet and get the best info concerning their Cards.