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How credit card interest is calculated?

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how credit card interest is calculated
how credit card interest is calculated

Do you feel shocked after seeing an unaware amount of credit card interest that would be deducted from your credit card account? It usually happens when your account is charged for the interest rate on your credit card purchases. From rewards schemes to cashback offers, credit cards provide greater financial flexibility. But, it only works if you have a clear understanding of how credit card interest works. Otherwise, you can’t get the maximum benefits of your credit card.

No problem would be faced by any cardholder if he or she pays monthly credit card interest on time. However, carrying a balance from month to month will raise the issue of a huge interest rate and more money to be paid off. So, before coming to any conclusion, one should know the problems associated with carrying a balance and credit card debt. In such a case, you should understand interest and APR in very simple words:

what are interest and apr
what are interest and apr

What are Interest and APR?

Credit cards can’t come without interest rates. It is an amount that you have to pay for borrowing money from a specified bank or finance company. According to Consumer Financial Protection Bureau (CFPB), credit card interest signifies the cost of borrowing money from a lender. In the case of cards, interest is expressed in the yearly rate, which is known as the annual percentage rate (APR). As APR reflects the annual rate, many credit card companies charge this interest in your monthly statement.  

An interesting point to be noted is the interest isn’t only charged on purchases but also on other transactions such as bank transfers and cash advances. You must know that APR on these transactions is usually higher than purchases on cards. For more clarification, check out the terms and conditions of the credit card to avoid any fraud or unwanted charges that you may pay while paying your credit card interest.

how to calculate your credit card interest
how to calculate your credit card interest

How to calculate your credit card interest?

There are three basic steps for calculating the interest rate of your credit card.

Convert APR to daily rate: Many credit card issuers charge interest daily. It means they add interest to your original balance till the day ends. In order to verify that interest, go through your cardmember agreement.

For mathematic calculation, divide your APR by 365. Make sure to divide your percentage value by 100 to change it into decimal form. Let’s assume 15.99% is your APR rate and your daily rate would be:

15.99%divide by 100/365 = 0.00044

Find your average daily balance: for finding the average daily balance, you should know your everyday balance during the complete billing cycle. For example, if your bill is generated on every 20th day of the month, you must know the balance of all 20 days. Add all your purchases and divide the amount by 20. For instance, we assume that your average daily balance is $2000.

15.99%divide by 100/365 = 0.00044

Calculate interest charges: After getting both values, average daily balance and daily rate, you can calculate the interest charges easily. Theoretically, you need to multiply the average daily balance with the daily rate. Then, multiply the amount by the number of days of your billing cycle. 

Mathematically, the result would be 17.6. It is the final interest charged for this billing cycle

0.00044x2000x20=17.6

How to avoid the interest rate of your credit card?

how to avoid the interest rate of your credit card

Now, you understood how credit card issuers charge interest in your monthly statement. If you find anything suspicious in your account, be wise and calculate the credit card interest on your own. If you don’t wish to pay the interest charges, keep the following things in your mind.

  • Firstly, try to pay the full amount of your card bill. Generally, you will get a 21-day grace period from the purchase date to the final payment due date. If you pay the complete amount at once then you would not have any cash advances. So, you won’t be charged on new purchases. 
  • Another thing to keep in mind is to pay a little more. In case if you are not able to pay the full amount, try to pay as much as you can. Doing so will help you to avoid late fees and lower the overall balance that’s meant for interest charges.

Importantly, opt for a credit card with zero percentage of introductory rates. Before adding any credit card to your financial health, check out if the card is available with a 0% introductory rate on your purchase. 

Conclusion

Above mentioned calculation gives you an idea of how much interest rate might cost on your purchases through credit card. However, if you don’t want to pay more interest rates, pay your full balance for every billing cycle.

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