You probably know that when you carry a balance on your credit card from month to month, you’ll be charged interest on that balance. The penalty for carrying a balance on a credit card stinks, but it’s the name of the game.
You may be wondering, “How is credit card interest calculated?” Well, we’re here to answer that question for you. Check out our credit card guide below to get more info about credit card interest.
How Is Credit Card Interest Calculated?
There are a few different ways that credit card issuers can calculate interest charges, but the most common method is the daily periodic rate. With the daily periodic rate method, your credit card issuer will take the APR (annual percentage rate) and divide it by the number of days in the year. Then, they’ll multiply that daily rate by the number of days between your statement closing date and when you actually paid your bill.
For example, say you have a credit card with a 15% APR and you carry a balance of $1,000. Let’s say your statement closing date was March 1st, and you paid your bill on March 15th. In this case, there would be 14 days between the closing date and when you paid your bill.
So, the calculation would look like this:
(15% / 365) x 14 = 0.038%
0.038% x 1,000 = $3.80
This means that you would be charged $3.80 in interest for those 14 days.
Of course, this is just one example, and your interest charges will vary depending on your APR, balance, and payment date.
What’s important to remember is that credit card issuers typically use the daily periodic rate method to calculate interest, so it’s a good idea to understand how this works. Doing so can help you avoid paying more interest than you have to.
If the thought of expensive credit card fees makes you want to avoid credit cards altogether, there’s a solution for you. No fee credit cards are the way to go.
What Is a Credit Limit?
A credit limit is the maximum amount of money that a financial institution will lend you. It’s also the maximum amount you can charge to your credit card.
For instance, you may have a credit card with a $5,000 credit limit. This means that the most you could charge to that card at any given time is $5,000.
Your credit limit is essential because it’s one of the factors that impacts your credit utilization ratio. This ratio is a key factor in your credit score, so it’s important to keep it low.
Credit Cards Explained
We hope this guide has helped you better understand how your credit card works. By knowing the answer to the question, “How is credit card interest calculated?” you can do your best to avoid extra fees.
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