A credit card interest rate is referred to as the percentage rate of the amount that a borrower is charged for a debt. What does APR mean on a credit card? The credit card interest rate is often charged as a yearly rate and increases annually which is known as the annual percentage rate (APR). When purchasing anything such as supplies or devices on a credit card, the money spent is from the credit card company. Many people ask, “How many credit cards should I have?”, well, the credit card APR is directly proportional to the risk associated with the borrower and is most often charged monthly by the credit card company so keep it to a minimum.
How Is Credit Card Interest Calculated?
Credit card interest is calculated on a compound interest basis. Credit card interest is compounded daily which means that banks charge interest to your account every day. In simple terms, the larger the balance of your bank account, the more interest you are paying on the credit that you owe to the bank. The interest charge of purchases on your credit card will be listed on your monthly billing statement. Credit card interest can be calculated using three steps listed below:
- Convert APR to a daily rate by dividing it by 365 which result in the periodic interest rate
- Find your average daily balance starting with the unpaid balance which is the amount that is carried from the previous month. When you purchase something this balance goes up and when you make a payment it goes back down.
- Multiply your average daily balance by the average daily interest rate and with the result, then multiply that amount by the number of days within the billing period.
What is a 0% APR Credit Card?
A 0% APR credit card is one where an account holder is not charged an interest rate for a certain period of time. During the beginning of this period, which is usually 6 - 21 months, the new purchases or balance transfers you make will not incur interest billed on your account balance. 0% APR credit cards help account holders on how to avoid interest on credit cards or combine their credit card debt when making interest-free purchases or using balance transfer credit cards.
Why do banks charge interest on Credit Cards?
Banks charge interest on credit cards when you have not paid the full balance of the previous month’s bill within the grace period and it carries over to the next month’s bill. When your balance is paid in full on the due date, you don’t pay on your credit card. Although, this is when your credit card does not offer a grace period. Quite often transactions do not have automatic grace periods regardless of if you have paid in full previously. Balance transfers also incur charges on purchases when they have a promotional rate and the purchases you make receive a regular interest rate.