What is a credit card interest rate?

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:

• How is credit card interest calculated?
• What is 24% APR on a credit card?
• Is credit card interest rate monthly or yearly?
• When are you charged interest on a credit card?
• What is credit interest in a savings account?
• What is a good purchase rate on a credit card?

Q1. How is credit card interest calculated?

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. 

1. Convert your annual percentage rate (APR) to your daily rate. Divide your APR (set by your card companies) by 365 to work out your daily interest rate.

2. Determine your average balance (daily). Your bank statement will advise you which days of the month are included in your billing cycles, and the interest rates you’ll be charged depends on your balance on those days. Start by calculating the unpaid balance (the amount of credit cards debt you carry over each month) and use the transaction information to go through your statement day by day to write down each day’s outstanding balance. Once this is done, add up all the daily balances and divide this by the number of days within your billing cycle. This will give you your average balance. 

3. Combine together. Now, multiply your daily balance by your daily rate, and then multiply this by the number of days within your billing cycle. This will give you your daily credit card interest.  If this seems too much, we recommend using a credit card interest calculator to work out the effect that credit card debt will have on your card's interest rates. 

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Q2. What is 24% APR on a credit card?

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.

Q3. Is credit card interest rate monthly or yearly?

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. 

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Q4. When are you charged interest on a credit card?

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. 

Q5. What is credit interest in a savings account?

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. 

Q6. What is a good purchase rate on a credit card?

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. 

Summing up

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.