Understanding Your Credit Card Interest

By deSita Anwarhee

Low Interest Credit Card

Credit Card Interest. Credit card suppliers now use many different methods of charging interest. If you pay your bill fully, this usually won’t affect you. But if you withdraw some cash with your credit card, or pay anything less than the full amount on your statement, you’ll normally be charged interest.

To calculate your credit card interest each month, the lender multiplies the credit card interest rate (the APR) times your credit card balance. This will give the interest for the full year. The lender will divide this interest calculated by the number of months in the year. The sticky part is calculating the credit card balance.

If you had two cards with the same interest rate and used them in exactly the same way, one could end up costing over twice as much as the other just because it calculated your interest differently. The reason for this is that card suppliers start and stop charging interest on transactions at different times.

If you do have a balance on your card, there are three methods of calculating it:

Average Daily Balance: the issuer calculates the balance by taking the amount of debt you had in your account daily during the period covered by the billing statement and averaging it.

Previous Balance: The issuer uses the balance outstanding at the end of the previous period that is, the period prior to the one covered by the current billing statement.

Adjusted Balance: the balance is calculated by subtracting the payments you’ve made from the previous balance.

Different transactions attract different credit card interest rates. Common rate that you will find on your credit card interest:

• purchase rate: Unless you pay off the balance fully each  month, you’re charged credit card interest on the value of purchases made with the card
• cash withdrawal rate: When you get cash advance, normally a higher rate of interest is charged, and  you’ll normally be charged from the day you make the withdrawal, even if you pay off the balance in  full.
• transfer rate: Most cards offer a reduced introductory rate for a debt transferred to the card  from elsewhere.

Holding a credit card balance actually negates any investment gains and can be very costly. The best way is just to pay off your balance entirely.  Paying the interest rates that credit card companies charge simply does not make sense if you have savings elsewhere. If you can’t completely pay off your balance, increasing your monthly payment will be very helpful in the long-term.

Chek out our other credit card guide on Bad Credit Credit Cards.