Understanding Your Credit Card Interest Rate

Understanding your credit card interest rate doesn’t make it any easier to pay your bill every month but it is a good idea to  understand the fundamentals of what credit card interest is and how it is calculated.

One of the most important terms to understand is APR or annual percentage rate.  This is the rate that credit card issuers charge on the unpaid balance each month.

Even though your interest rate appears on each of your monthly bills, it is actually an annual rate.  Credit companies divide this rate over twelve months to calculate the amount of interest charged.

Here is an example.  Say for instance you have a credit card with a $2000 balance owing.  In January, you made a payment of $100.  That means the remaining balance is $1900.  This is the amount that you will be charged interest on.

Next, take the yearly rate of interest and divide it over twelve months to give you the monthly rate.  The final step is to multiply your unpaid $1900 balance by the monthly.

Although there are slight variations to this calculation with some credit card companies, most use a formula similar to this one.  From time to time, some companies will use a daily interest rate but it is not overly common.

Of course, if you pay off the full amount before the due date, no interest is tallied.  This is by far the best way to avoid many common credit card pitfalls like falling into credit card debt or letting missed or late payments affect your credit score.

When it comes to the basics of using credit cards, there are few things more important than understanding your APR.  It is more then just some number on your bill.