- Understanding Interest
- When Do You Get Charged Interest?
- How to Avoid Interest Charges
You’re generally charged interest on credit cards from the day you make a purchase until the day you pay your bill in full. Learn more about how to avoid paying interest on your credit card purchases.
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Interest is the price you pay for borrowing money. When you get a credit card, you’re borrowing money that you’ll have to pay back with interest. Depending on your credit card, you may be charged interest on purchases, cash advances, and balance transfers. You may also be charged interest on your account if you don’t pay your balance in full every month.
What is interest?
Interest is the charge for the privilege of borrowing money, typically expressed as an annual percentage rate (APR). For credit cards, the APR can range from about 10% to about 30%.
You may also see references to “annual percentage yield” (APY). APY is different from APR because it reflects the interest you’d earn if you kept your money in a savings account for a year. In other words, it’s a measure of how much interest you’d earn on your deposit, rather than how much interest you’d pay on a loan.
How is credit card interest calculated?
Interest on credit cards is typically calculated using a daily periodic rate. This is the APR divided by 365 (366 in a leap year). For example, if a credit card has an APR of 18%, the daily periodic rate would be 0.049% (18% divide by 365 days).
The daily periodic rate is then multiplied by the number of days in the billing cycle, and that total is the interest charged for the period. Let’s say you have a credit card with a $1,000 balance and 18% APR. The billing cycle is 28 days long. The daily periodic rate would be 0.049% (18% divide by 365 days). That’s multiplying 0.049% by 28 to get 1.372%. So, you would be charged $1.37 in interest ($1,000 x 1.372%).
Interest is calculated based on your average daily balance during the billing cycle. Your average daily balance is your beginning balance for each day of the billing cycle, plus any new charges and minus any payments or credits you made during that day, divided by the number of days in the billing cycle.
When Do You Get Charged Interest?
Most credit cards will charge you interest on your balance if you don’t pay it off in full every month. This means that if you only make the minimum payment, you could end up paying a lot of money in interest. Interest is usually charged on a daily basis, so if you make a purchase on the last day of your billing cycle, you’ll start accruing interest immediately. It’s important to know when you’ll be charged interest so that you can avoid it if possible.
Interest charges on new purchases
If you have a credit card with a balance transfer offer, you may be wondering when you’ll start accruing interest on new purchases. The answer depends on your card’s rules.
Some cards will start charging interest on new purchases immediately, from the date of the purchase. Others will give you a “grace period” of 21-25 days from the end of the billing cycle during which new purchases will not accrue interest.
It’s important to know when your card starts charging interest on new purchases, so that you can avoid it by paying off your balance in full before that date. You can usually find this information in the card’s terms and conditions, or you can call the issuer and ask.
Interest charges on cash advances and balance transfers
Cash advances and balance transfers usually start accruing interest immediately. This means that you’ll start paying interest on the day you make the cash advance or balance transfer, and you’ll continue to pay interest on that amount until you pay it off in full.
How to Avoid Interest Charges
If you have a credit card, you may be wondering when you get charged interest on credit cards. The answer depends on your credit card issuer, but there are some general rules. If you pay your entire balance by the due date each month, you will never be charged interest. However, if you carry a balance from month to month, you will be charged interest on that balance.
Pay your balance in full each month
Interest is charged on your credit card balance from the date of your last statement until the date you pay it off. To avoid being charged interest, you must pay your balance in full each month.
If you don’t think you can afford to pay off your balance each month, there are a few other options to consider:
-Transfer your balance to a 0% APR credit card: Many credit cards offer intro APRs of 0% for a promotional period, usually 12-18 months. This can give you some breathing room to pay off your debt without accruing interest charges.
-Get a personal loan: Personal loans typically have lower interest rates than credit cards, so this could be another option for debt repayment.
-Set up a budget and make extra payments: If you’re not able to pay off your balance in full each month, make sure to at least make the minimum payment. Then, try to budget so that you can make additional payments on your debt each month. Even an extra $50 per month can help you get out of debt faster.
Use a 0% APR credit card
If you have good credit, you can usually find a 0% APR deal on a new credit card. This means that for a set period of time—usually between 12 and 21 months—you won’t be charged any interest on your balance. Just make sure you pay off the full balance before the intro period ends, or you’ll be hit with retroactive interest charges.
Sign up for a credit card with a grace period
A grace period is the interest-free period you have on purchases made with your credit card. If you pay your balance in full and on time each month, you will not be charged interest on your purchases. However, if you carry a balance on your credit card from month to month, you will be charged interest on those balances.
Most credit cards offer a grace period of 21 to 25 days, but some cards do not offer a grace period. If you are not sure if your credit card has a grace period, check the terms and conditions of your card or contact your credit card issuer.
To avoid being charged interest on your purchases, sign up for a credit card that offers a grace period. Then, make sure to pay your balance in full and on time each month.