Aside from offering rewards programs, credit cards also come with various benefits. However, if you don’t know how to maximize these, you might pay more than you should. In an ideal world, you would never have a balance on your credit card. Unfortunately, many people carry a credit card balance for multiple months.
Most people fail to realize how much money they spend on interest and fees while carrying a balance on their credit cards. Interest amounts boil down to your APR (annual percentage rate). To calculate credit card interest and see how much you pay, consider using a calculator from SoFi.
- Difference Between APR and Interest
Most credit cards have an interest rate, which is the cost that you’ll pay for borrowing money if you can’t pay it off in full. For example, a credit card’s annual percentage rate, or APR, is typically calculated as a yearly rate. It’s typically used to determine the interest you pay each month.
According to the experts at SoFi Invest, “You have an idea of your interest rate, but by the time you’ve paid off your credit cards, you may be shocked to see how much those interest payments have added to your bill.”
- Calculating Credit Card Interest Fees
Let’s say that you have a credit card with a 15.99% variable rate. You’ll need to know how many days you have in your billing cycle and the average daily balance to accurately estimate how much interest you’ll be charged.
Ultimately, you will take the number of days in a year and divide it by your APR. Next, you will take your average daily credit card balance and multiply it by the daily periodic rate. Once you have this number, you will multiply it by the days in a billing cycle.
- Determine Ways to Avoid or Reduce Interest Charges
Aside from never using your credit cards, there are ways to minimize the amount of interest that you’ll be charged in a billing cycle. For example, you can avoid interest charges by paying off your credit card bill each month. Usually, credit card companies give you a grace period of at least 21 days after the purchase date to pay off your balance before interest and fees are charged.
If you can’t pay off your balance in full, consider paying off as much as possible to avoid late fees and lower the overall balance subject to interest.
Do All Credit Cards Offer Grace Periods?
No. Although credit card companies are not required to offer a grace period, they must ensure that their bills are delivered at least 21 days before the due date.
Differentl Types of APRs and Interest Charges
Before you sign up for a new credit card, check the fine print to ensure that it includes all of the details you need to know. A credit card’s annual percentage rate (APR) can be fixed or variable. A fixed rate is typically the same, but it can change depending on the situation.
A variable rate is usually linked to the prime rate, and it can change depending on the situation. For example, most credit cards come with a purchase APR, a balance transfer APR, an introductory APR and a cash advance APR. Some credit cards have penalty APRs they charge for late payments or when customers violate the credit card issuer’s terms and conditions.
Before you sign up for a credit card, make sure that you understand the terms of the deal and its interest rate. Also, it’s important to note that the credit card company can change its interest rate depending on the situation.