How does credit card interest work?
Generally, when we talk about credit card interest, we mean the purchase interest rate, which is the interest charged on purchases you make with your credit card.
If you don’t pay your full balance each month (or even if you pay the minimum amount), you are charged interest on all the outstanding transactions and the remaining balance. However, interest is also charged on cash advances, balance transfers, special rate offers and, in some cases, even the fees charged by the company.
The interest rate can vary, depending on the credit card. Some have an interest-free period, otherwise you start paying interest from the day you make a purchase or from the day your monthly statement is issued. So avoid interest by paying the full amount promptly.
Credit card interest can quickly turn a manageable balance into unmoveable debt. So being able to understand how interest rates translate into dollars is an important skill to acquire.
The common mistake people make is focusing on the credit card’s annual percentage rate (APR), which often sits between 15 and 20 per cent. While the APR does provide a rough idea of how much interest you’ll pay, it’s not entirely accurate.
This is because you actually accrue interest on your balance daily, not annually. So, you need to work out your daily periodic rate (DPR). To do this, divide your card’s APR by the number of days in a year (e.g. 16.9 per cent divided by 365, or 0.05 per cent). You can then apply this figure to the daily balance on your credit card.
A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.
Credit card debt can cripple your finances. If you’re wondering how to get rid of credit card debt, here are a few steps to get you back in the black:
Calculate your debt – Knowing the magnitude of your credit debt is important. Online credit debt calculators make it easy to determine the debt size, and repayments required.
Work out a repayment plan – Take some time to formulate a credit repayment plan. Consider increasing your income, scaling back your lifestyle or refinancing.
Talk to your credit provider – If you’re still struggling with your debt, talk to your credit provider. You may be able to come to a new arrangement.
Many people want to know how to get a free credit card. The reality is that all credit cards come with associated costs when used to make purchases – even if it’s simply the cost of making repayments.
However, many lenders offer incentives for customers such as a $0 annual fee or 0 per cent interest on purchases during an introductory period. You may be able to cut down on the usual costs associated with a credit card by comparing and choosing the right card to suit your requirements.
Additionally, paying off your balance in full during an interest-free period means you could only have to pay back the cost of purchases without interest. You could also be eligible for additional rewards such as cashback during that time, saving you more money.
Credit cards can be useful, provided you understand the risks. If you’re wondering about how to make a credit card online application, here are some steps to follow:
- Test the market – Many credit card options are available online. Compare providers by fees, interest and perks to ensure you’re getting the best deal.
- Complete the application – Once you’ve selected a card, head to the provider’s website and complete the online credit card application form. Forms vary by providers.
- Provide details – Most cards require you to meet age, residency, income and credit status condition, and you need to provide details like a bank account statement to prove this.
- Review details – Ensure the information you’ve entered is correct.