If you’re looking to take out a credit card, you’ll need to carefully plan which card types are right for you. The interest rates you’ll pay on your card balance will contribute to the fees you’ll be expected to pay when using your new card. It’s therefore fundamental to understand what a credit card interest rate is and how it works.
Let’s get to the following commonly asked questions:
Credit card interest rates are charged on a daily basis depending on how much card debt you carry over the month.Your card issuer will set your average percentage interest rate which will be used to calculate the amount of interest you pay monthly. The average credit card APR set by credit card companies is currently 19.94 percent.
Let’s take a look at how you can calculate your credit cards interest rate.
A 24 percent APR on your credit card means that the interest you’re charged over the year is roughly the same as 24 percent of your credit card balance.
For instance, if your card balances add up to $5,000 at the end of the year, your card APRs would charge you $1,183.55 in interest. To avoid this, work on paying your balance in full, or regularly paying on time and above the minimum amount.
Your current credit card will most likely charge a yearly rate, known as your APR. However, while the APR is represented as an annual charge, your credit card's APR is used to calculate the interest you’ll be charged at the end of the month.
You’re only charged by credit card issuers if you’ve paid less than your full balance by the end of the month. So for example, if your balance at the end of the month is $1,000, you’ll be charged depending on your card rates.
If you're consistently paying very high interest that’s making it difficult to pay off your balance in full, you might want to consider a balance transfer card. A balance transfer credit card allows you to transfer your balance to a lower interest rate card, so you can pay off debt. However, please note that you’ll likely be charged balance transfer fees depending on your APR credit card agreement.
If you miss the payment due date, you could face penalty APR(s) on your credit card accounts, and your credit card rate increases rapidly. In this instance, we would recommend taking out a personal loan to clear the debt. This will help in improving your credit.
Interest on a savings account is the amount of money a bank pays an individual for holding money. The bank will borrow money from the individual by using their funds in order to lend money to customers.
Unlike your card APRs, your purchase APRs are the rate applied to any new purchases you make and are the amount charged on your outstanding balances.
This only comes into effect when you're past the grace periods, so you won’t face charges straight away. If you carry a balance over from month to month, you will be charged interest on your purchase rate.
A “good” purchase rate is anything below 14 percent, and is only available to those with excellent credit scoring and a low credit utilization ratio. If you have bad credit, you’ll likely pay a significantly higher interest rate.
To improve your credit score avoid paying your bill late and consider taking out a debt consolidation loan to pay off your debts quicker.
Make sure to pay attention to your card’s APR rate when carrying a balance to avoid paying high fees and falling into credit card debt.
If you’ve fallen into the cycle of debt, there are many ways to avoid paying high-interest fees. Check out our loans designed to help you take control of your personal finance.
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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.