Credit Card Interest Explained
- A credit card’s annual percentage rate, more commonly known as APR, tells customers how much interest they are being charged on their credit card debts. The interest charged each month is 1/12 of the APR. Therefore, if a card has an 18 percent APR, the balance is charged 18 divided by 12, or 1.5 percent interest each month.
- Credit card companies generally offer interest rates depending on a customer's credit score and financial status. People with poor credit history are more likely to leave their bills unpaid, so credit card companies charge higher interest to compensate for the risk. However, consumers with credit cards that carry high interest rates can often lower their interest rates simply by calling the credit card company, according to Bankrate.com. This is especially true for customers who have held the card for at least a few years and who use only a small percentage of their credit line.
- Under new credit card laws signed in 2009 and implemented in 2009 and 2010, credit card companies must notify customers at least 45 days in advance of an interest rate increase. This law does not apply to customers with variable rate credit cards, which fluctuate based on the prime interest rate. Customers who are notified of a rate increase can choose to cancel their credit card accounts and take up to five years to pay off the closing balance at the old interest rate.
- Credit card companies calculate monthly interest based on one of a few different methods. Typically, the company will multiply 1/12 of the APR by either the balance on the card at the beginning of the billing cycle, the balance at the end of the billing cycle or the average daily balance during the billing cycle. Credit card companies often have a grace period for new purchases, meaning that you are not charged interest for them if you pay for them in full by the monthly statement due date.
- Because credit card interest rates are high and minimum payments are a proportionally low percentage of the total balance, consumers may take many years to pay off a credit card debt. In many cases, consumers end up paying twice the amount they had charged to the card because of all the interest charged over the years. Making extra payments beyond the minimum payment helps to lower the amount of interest paid and the time it will take to pay the debt in full.
Annual Percentage Rate
Determining Interest Rates
Rate Increases
Calculating Finance Charges
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