Most of us know how to use a credit card, but get a little confused by how interest is calculated and then charged to our account. However, by understanding credit card interest and the types of interest that can be charged, you will not only save yourself a fortune, but youll also be able to find the right credit card for you.
Credit Card Interest
Most credit card providers will charge you interest on the amount of credit youve used. Therefore, the more you purchase using your credit card, the more youll have to pay in interest. To avoid paying too much in interest, you can elect to pay-off your credit card balance sooner or you can find a card that offers you either an interest-free period or a lower rate of interest.
Credit Card Interest Rates
The rate of interest charged by a credit card provider is typically an annual percentage rate (APR). When you use the credit card you will then be charged either a purchase interest rate or a cash advance rate. The purchase rate applies to goods and services bought using your credit card, and the cash advance rate is charged when you make withdrawals using your credit card from an automatic teller machine (ATM). Most credit card providers will charge you a lower rate of interest for purchases, and a higher rate for cash advances.
The daily interest charged on purchases and cash advances is calculated by dividing the rate of interest your credit card provider charges for each, by the number of days in a year, being 365. For instance, a credit card with an interest rate of 19.2 percent for purchases, will have a daily rate of approximately .00050 percent. Now this doesnt sound like much. But when you apply this to say a $4,000 balance daily, this adds approximately an extra $2 to your credit card balance on the first day. This means that tomorrow you owe $4002 on your credit card, and that the interest is then charged on the $4002. This continues on until you pay the full balance of your credit card off.
How is Credit Card Interest Calculated?
Three factors determine how your credit card interest is calculated, these being:
1. The type of credit card you have rewards, 55-days interest-free, no-frills etc.
2. The balance existing on your credit card.
3. The type of transactions you make cash advance or the purchase of products or services.
4. The time in your statement cycle that you made a purchase.
5. Lets look at these points in greater detail.
Credit Card Type – Rewards cards typically have between a 2 and 5 percent higher rate of interest. This covers the cost of having the rewards. So if you have a rewards card then you need to bear this in mind when you make purchases. Interest-free cards only give you an interest-free period if you have paid out your credit card balance the month previously. Otherwise all new purchases will incur interest from the day of purchase. No frills cards have no additional features, such as interest-free periods, but they usually have lower interest rates.
Credit Card Balance Ideally you want to pay off your credit card balance monthly, so that you dont incur interest. For example, if you buy a lounge for $800 one month, and youve only paid $400 off by the beginning of your next statement, then the $400 you owe and any additional purchases you make on your credit card will incur daily interest.
Type of Transactions – Cash advance purchases usually dont have an interest-free period and their interest rate is typically around 5 percent higher than your standard credit card rate.
Statement Cycle If you make a purchase at the beginning of your statement cycle, lets say on the 1st of the month, then youll get the full 55-days interest free before you will incur interest. So a 55-day interest-free credit card typically gives you 30-days in a month, plus an extra 15-days in the following month before your payment is due.
Are you unhappy with your current credit card? Do you want to reduce your credit card debt? If so then contact eChoice, we can help YOU.
Written by eChoice
Since 1998, eChoice has helped more than 50,000 Australians secure a home loan through its network of over 25 lenders and hundreds of loans. Best of all our service is cost and obligation free!