Before we go any further, let's make one thing clear straightaway: carrying credit card debt is never a good idea. We always recommend that you pay off your credit card bills on time and in full. However, we understand that this isn't always possible. If you're carrying any sort of balance from month to month, understanding credit card interest should be your first order of business.
Understanding Credit Card Interest
Your Credit Card's Interest Rate
All credit cards come with different interest rates, so research your specific card to learn the exact numbers. Be aware that your card could have different APRs for different transactions (purchases, balance transfers, etc), and that some of those interest rates will vary over time. For example, to attract new cardholders, a company may offer a lower interest rate for a certain period of time and then adjust that to a higher level later on.
Variable Vs. Non-Variable APRs
A variable APR is calculated by adding a set number (called the margin) to a reference rate (called the index), such as the U.S. Prime Rate. So if the U.S. Prime Rate changes, your interest rate will change as well. A non-variable APR is determined by a reference rate, making it more stable. However, if it's not guaranteed, the issuer can change the reference rate based on how you use your card as well as the market conditions.
How the Interest Rate is Calculated
The
annual percentage rate (APR) refers to the yearly rate of interest on your credit card, and your interest charges will be calculated on a monthly basis. However, because months vary in length, your issuer will likely use a Daily Periodic Rate (DPR) to calculate your interest charges. To figure out how much you're paying in interest daily, divide your APR by 365. Each day, your credit card's issuer will multiply your current debt by that daily rate to find the daily interest charge.
How Interest Is Added to Your Balance
Different issuers use different methods to determine the total balance subject to interest. For example, most use an average daily balance, which is calculated by adding up the monthly balance and dividing it by the number of days in the month. Others use an adjusted balance, which is calculated by subtracting the previous day's balance from the total. Whichever method is used, the APR is applied to that balance. The term compound interest refers to the interest calculated on the initial balance and also on the accumulated interest of previous days.
Grace Periods
Luckily, you can avoid credit card interest by taking advantage of the grace period offered by most credit card companies. If you pay your bill within this three- to four-week period, your charges will be waived. However, you must make the entire payment on time. If you don't, the interest that has already been incurred will be added to your next statement. Contact your credit card company to find out if they offer a grace period.
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If you steer clear of credit card debts and interest charges, you won't have to worry about all of these pesky interest rates, but regardless, you should still understand how they work. Look for credit cards with low interest rates, reasonable grace periods, and friendly customer service.
Are you interested in opening a new credit card? You'll be pleased to hear that
BluCurrent Credit Union offers two great options: the VISA® Platinum and the VISA® Classic. The Platinum offers rewards on every purchase you make, and the Classic comes with no annual fee, no cash advance fee, and no balance fee! To learn more about our credit cards, please click
here, and to open an account, visit any of our
branches. You can also give us a call at 417-887-1983 or e-mail us at info@blucurrent.org for more information.
