How is credit card interest calculated?

Credit Card interest is the main aspect of credit card debt that results in multiplied troubles for many Americans. It isn’t just the amount of debt that is being charged and balances that are being carried over that result in an overwhelming load. Credit card interest compounds the problem if you carry a balance, and this makes it very difficult to pay off credit cards. Here are some important items to know concerning credit card debt and how credit card interest is calculated.

Fixed and Variable Interest Rates

The first item to know when calculating credit card debt is whether the rate is fixed or variable. A fixed rate does not change through the duration of your credit card ownership, unless you are given specific information concerning the change and time to make any adjustments you need to make. It is illegal for a credit card company to change your fixed interest rate without notice.

Be careful though!

The way that credit card companies inform you about changes varies greatly. For example, some companies put it in the fine print on the bottom of your monthly statement. Some companies send you a pamphlet filled with pages of information and somewhere among the pages the new interest rate will be listed. If you are signed up for e-statements, some companies will send you an e-mail with updated account information.

A fixed rate can be anywhere from 2% to 30% or even higher. Just because a rate is fixed, doesn’t mean it is a good deal. However, the benefit of a fixed rate is that you know what to expect from your credit card. A variable rate is a rate that can vary based on your balance, payment history, and other factors. A variable rate can change from month to month without any notice.

Variable rates can cause your monthly payments to go up drastically from month to month. If you do not expect this increase and can’t pay the minimum amount due, then you will be charged a late fee. Once this happens, it is difficult to break the cycle and try to catch up. Variable rate credit cards always start off low and slowly increase. The low starting interest rate is what draws people in.

Introductory Rates

Another appealing factor of many credit card offers is an introductory interest rate (hence the popularity of low interest credit cards and balance transfer credit cards). This can start as low as 0%. Most introductory rates have time limits such as 0% interest for one year. Be careful. Introductory rates often have many details in the fine print. For example, some cards compile your interest and if you carry a balance at the end of the introductory time period, all the interest will be applied to your outstanding balance.

Other cards have an appealing introductory rate, but when the period is over, rates increase drastically. You can go from a monthly payment of $20 to $100 when the period is over. The best way to use an introductory rate is to pay off your balance before the specified time period is over. This way, you will pay little or no interest and can stop using the card if the interest rate increased drastically.

Introductory rates are especially appealing for special purchases such as electronics, furniture, or home improvements. It is tempting to convince yourself you will pay off a balance within the specified time frame and then to purchase the specialty item you want. If you can’t pay the balance within the time frame there is often compiled interest added or drastic interest rate increases on these specialty types of cards.

Annual Percentage Rates

Interest is typically calculated as an Annual Percentage Rate (APR). Though the word annual implies a yearly calculation, interest is actually calculated daily. Daily interest is calculated through a billing cycle. Most billing cycles are 28-31 days. If you get to the end of your cycle and carry a balance, a percentage of interest will be added. If you pay off your balance within this period, no interest will be charged. If you continue to carry a balance, you will be charged interest every month.

The best advice is to check your statement every month, no matter what. If you get paperless billing, look over your e-mail bill or go to the credit card website and look at your bill every month. You want to make sure the charges are correct, your payments went through, and there haven’t been any unexpected changes. If you don’t notice something for a month or more the less likely the credit card company is to work with you.

It may seem unfair to say that credit card companies will purposely trick you, but their money is in interest rates. Raising your rate, getting you to carry a balance with tempting offers, and giving penalties for things like paying off your balance early are all things to watch for. For more information about calculating your interest rate, you can go find an online calculator designed for this purpose.

Before getting stuck with a credit card interest rate you can’t handle, consider using the credit card “Chaser” on our home page. This tool can help you compare what different cards have to offer, what introductory rates are available, and what long term interest rates you can expect. Get started doing your homework to find the best credit cards now!