A credit cards interest rate plays a crucial part when it comes to how much you will be paying on your cards monthly balance. The average daily balance you accrue on your credit card is multiplied by the daily rate of your APR. This is then multiplied by the outstanding amount on your credit card. Here is how your APR will affect how much you end up paying on your credit card.
Wrapping your mind around credit card terminology
If you own a credit card you might have come across some terminology that leaves you scratching your head, which is normal. Not everyone one of us works at a financial institution or a bank to understand what these terms mean. However, when it comes to your credit card the most common terms you might come across are:
This means the Annual Percentage rate which determines how much interest rate p.a. gets charged to your card. You can get a card that has a low APR rate at 9.99% right up to 21.99%. This is one of the important features of a card that you need to check out before signing up for a card.
This is the APR (%) that is used on the card and is divided into 365 days.
Average Daily Balance
This is the average balance in your account for a month. Your APR will also influence how much you end up paying in terms of the overall amount.
There are different types of credit card interest
Before you rush to grab your calculator and tap out numbers to see how much you could be paying on a monthly basis, you need to be aware that there are different types of credit card interest.
- Introductory interest rate: This is usually a low rate that is offered at 0% for a select period of time, which is usually between 9 months – 12 months. You should check the terms that come with these cards as it usually reverts to a higher percentage when the introductory period is over.
- Purchase rate: This is most commonly referred to as an interest rate an is applied to any new purchases that you make on your card.
- Balance transfer rate: This is an interest rate that is charged for balances that are transferred to a credit card. It is usually either the purchase rate or the cash advance rate.
- Cash Advance rate: This is an interest rate that is applied to cash advance transactions and has an APR that is usually higher than the purchase rate. This can be a rate that is usually set at 21% p.a.
The various interest rates that come with a card can affect how much you will be paying on your monthly balance. If you fail to analyse this factor before applying for a card, you could find yourself swimming in hot water as you try to meet payments in full each month.
Crunching the numbers in practical terms
Now that you know the terminology and how the interest rates work, a practical example can help you understand the full picture.
You have a balance of $2,000 left on your credit card. Your card has an interest rate of 16% p.a. that is charged to it. You will divide the 16% by 365 days, which means that your daily interest rate will be at 0.044%. Let’s assume you don’t pay anything on your balance for the first 15 days. However, you are able to pay $500 on the 16th and another $500 on the 25th leaving you with a daily average balance of $1,650. By knowing the interest rate (0.044%) and your daily average balance ($1,650) you will be able to figure out what the monthly interest charge rate will be on your credit card. i.e $1,650 x 0.044% x 30 days of the month = $21.78.
Before you settle for a credit card you can compare the additional perks that can help you manage your cards interest rate. You can look for cards that come with interest-free days or 0% interest rates offers. If you are eyeing the complimentary extras such as free complimentary insurance or rewards always keep in mind to weigh the value against the cost.