How Does Interest Work on a Credit Card?
Credit card interest is what you are charged according to the terms of your cardmember agreement. It works as a daily rate calculated by dividing your annual percentage rate by 365, and then multiplying your current balance by the daily rate. That amount is then added to your bill.
If you’re carrying a revolving balance month to month, you have likely noticed interest charges on your monthly card statement. Do you have questions about how these charges are calculated? Remembering just a few facts about credit card interest will empower you to make the best financial decisions for yourself and your family. Here’s what you need to know:
What is my credit card interest rate & how does credit card APR work?
Your credit card purchases are subject to a standard interest rate called the annual percentage rate, or APR. This number will vary from card to card and person to person depending on factors such as credit scores and your credit card issuer. Your APR is expressed in terms of a year, but credit card companies use it to calculate charges over your monthly statement period. So just like “miles per hour” is a way of measuring speed over an hour, APR measures interest over the time period of a year. But in both cases, the measurement can still be used for longer or shorter time periods.
How much is credit card interest & how is credit card interest calculated?
To find out how much interest you’re paying on your balance each day, you can convert your APR to a daily percentage rate. To do so, divide your APR by 365, the number of days in a year. At the end of each day, the card issuer will multiply your current balance by the daily rate to come up with the daily interest charge. That charge is then added to your balance the next day, a process called compounding.
If your credit card has an APR of 15%, it will have a daily rate of 0.041096%. Let’s say a cardholder has a balance of $1,000 at the 15% APR standard interest rate. The next day, interest is added and the balance becomes $1,000.41, plus any additional purchases and minus any new credits or payments. This process occurs each day until the end of the cardholder’s monthly statement cycle. So at the end of the month, the beginning $1,000 balance becomes $1,013 when interest charges are applied at 15% APR.
When does interest start on credit card purchases?
Here’s a great secret about credit card interest: credit card companies usually grant you a grace period on purchases. If a grace period applies, the credit card issuer will not charge you interest on purchases if you pay your entire balance by the due date each month.
However, if a cardholder fails to pay the entire statement balance, or does not make the payment in time, the cardholder has forfeited his or her grace period, and the interest charges will typically appear on the next statement. But cardholders should always check their cardmember agreement for details specific to their account.
Can a credit card have more than one interest rate or APR?
- Separate interest rates and charges can apply to cardholder’s cash advance balance and balance transfer balances. Furthermore, many credit cards will impose a higher penalty interest rate when cardholders fail to make payments.
- Most credit card variable interest rates can change with the prime rate. The prime rate is an interest rate that is three percentage points above the federal funds rate, which is set by the Federal Reserve Bank. Because this interest rate can increase, cardholders should be careful not to incur more interest charges than they can comfortably pay each month.
- Remembering these simple facts about credit card interest will empower you to make the best financial decisions for yourself and your family. Use Discover’s credit card interest calculator to estimate the interest and payoff time for any credit card.
Discover interest charges on purchases
Each provider, and every individual credit card they offer, has their own unique set of terms that’ll set the APR you may pay on purchases you make, so it’s important to carefully research the best credit card option for you. Understanding these terms can help you effectively map out your credit strategy, granting you the points or cash back rewards of your choosing, or simply growing your credit score gradually over time.
For example, Discover typically offers credit cards with 0% introductory APR offers that apply for a certain amount of time and then the standard variable purchase APR would apply to the balance.. Knowing which credit card is best for you soon becomes knowing how your credit score plays into the small differences in terms that set apart other credit card companies, understanding how to start building credit, or even just needing to read a little bit more about APR. If you’re not sure where to start, there are a number of credit resources available online today to help you further your success on a lifelong credit journey.
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