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Do you enjoy borrowing money for free? For those that pay their monthly balance in full every month, their avoiding finance and interest charges.
In short, they’re borrowing money from their lenders for free, no added cost.
On the other side, if you don’t pay off your full balance by the due date each month, you’re going to be paying interest charges.
When you have revolving credit or carrying a balance monthly, you are being charged interest on a daily basis.
This affects your existing balance and new purchases, this is how credit card lenders make money.
Combine this with high rate credit cards and you start to see why someone can get into credit card debt.
The good news, you can avoid all these extra charges, you just have to follow the tips we’ll be discussing in the article below.
How do we do it? Interest doesn’t apply to your daily balance when you pay your credit card bill in full. Most credit card companies give you an interest free grace period for 21 days.
Make sure you’re taking advantage of it!
Now, if you don’t pay your full balance one time, your grace period will end. You’ll have to make at least 2 full payments for 2 consecutive months to get your grace period back.
How Is Credit Card Interest Calculated?
All credit cards have an annual percentage rate, also known as APR. Your credit card’s APR is not the same thing as your interest rate, but the two are closely related.
In order to calculate our credit card’s interest rate, we will divide the APR for your credit card by 365 (total amount of days in the year).
By doing so, this will tell you how much interest you’re being charged every day when you carry a balance month to month.
Another thing you have to mindful of is the fact that credit card interest will apply to your average daily balance over the course of your billing period.
If you have a balance to begin the billing period and continue to make purchases through the month, the amount that incurs finance charges will be greater than the original balance.
When Your Credit Interest Won’t Apply
Credit card lenders do not charge you interest if you don’t carry a balance month to month.
The majority of them offer a no-interest grace period for 21 days, from the date your bill becomes available to your payment due date.
If you don’t pay your full balance by the due date, you will lose your grace period. When you have a balance that carries over, this is known as “revolving balance.”
If you pay your balance in full for 2 consecutive cycles, you won’t have a revolving balance.
Being Charged Interest With No Balance
If you’re not aware how the credit card billing process works, you may get angry that you’re being charged interest since you don’t have a balance.
Granted, some of these interest charges could be a mistake, this is why we always recommend monitoring your credit and paying attention to your credit card statements.
Let’s use an example.
On your last monthly bill, you did not pay your bill in full and you owe $400. Your next credit card statement becomes available on June 22nd.
While you may have until July 22nd to make a payment on time, interest would be applied based on the average daily balance in the interim.
Due to this, the amount you owe will grow each day of the period.
Due to this, when you get your next bill, your balance will be equal to the interest charges you built up the prior month. If you don’t pay this amount, you incur interest on top of interest.
How Are Credit Card Interest Rates Determined?
The interest rate you get when you open a new credit card depends on a few core factors, the greatest factor being your credit score.
In most cases, the better your credit score is, the better chance you have of getting a low interest credit card.
If you have bad credit, you should expect a high interest rate until you’re able to build good credit. You may be forced to get a secured credit card versus a regular credit card.
With a secured credit card, you must make a deposit to cover the credit on the card.
If you want a card that has a $500 balance, you’ll have to deposit $500 in your bank and pay it to the credit card lender.
While this is not a popular choice, this gives you the opportunity to begin building credit, which is very important.
The other core factor that determines what interest rates you get is the credit card itself.
Cash back credit cards typically have a higher interest rate versus a regular credit card. Store credit cards always have a high APR, that being despite of great credit or not.
When you apply for credit cards, you’ll see the APR will read something like this;
APR of 11.99% to 21.99%
If you have a great credit, your interest offer will be on the lower end. If you have fair credit, expect it to land on the higher end as your credit influences interest rates greatly.
It’s also important to note that credit card lenders can change APRs, they can change them at any time they want as long as they give you 45 days notice.
Lastly, credit card interest rates are often tied to some form of the economic index, like Prime Rate.
This is what the (V) next to APR means. When changes are applied to this rate, interest can rise or fall.
Best Way To Avoid Credit Card Interest
While we’ve touched on this point throughout the article, it’s important to know.
If you want to avoid credit card interest, the best way to make it happen is always paying off your balance in full every month.
The good news, there’s a few more ways to avoid pesky interest charges.
Pay Balances Quickly - Remember, interest gets assessed on a daily basis, so waiting for your due date to pay is going to rack up more interest.
Zero Percent Interest Credit Card - A zero percent credit card allows you to avoid interest on purchases or a balance transfer for a specific number of months after opening the new account.
These types of cards usually give you 12-15 months to pay off the balance without having to pay interest. Make sure you utilize them.
Improve Your Credit - The better your credit is, the less interest you’re going to have to pay. Start working on your credit card and begin building a strong credit profile.
As you build your credit, you can get rid of high APR cards and replace them with lower interest cards.