How Does Credit Card Interest Work?

Garrett Ransom
Jul 28, 2017 · 3 min read

“I got broads in Atlanta
Twistin’ dope, lean, and the Fanta
Credit cards and the scammers
Hittin’ off licks in the bando” — Desiigner (Panda)

I got a problem with spending before I get it

Credit cards are pretty amazing tools when they’re used properly. It’s a free loan for thirty days. The problem is that most people use them the wrong way and credit card companies usually don’t make it any easier to play along. Institutions use confusing jargon that the average credit card user may find hard to understand.

Every financial expert always talks about paying off your credit card debt as quickly as possible. Why? Credit card interest rates are very high. So for any money you don’t pay off within the grace period of thirty days, you’re paying off that balance, as well as all the interest that comes along with it. The average credit card APR (annual percentage rate) is over 15 percent! To put this in perspective, check out your student loan interest rates. Your credit card interest rate is probably at least twice the size of your student loan interest rate.

There are really three keys to not getting the short end of the stick using credit cards:

  1. Pay off your account balance within the grace period — if your account balance is zero at the end of the month then you don’t get charged any interest.
  2. Always make the minimum payment for your credit card balance at the very least — if you don’t your interest rate may skyrocket.
  3. If your account isn’t at zero, pay off your debt as quickly as possible. Paying the minimum is an easy way to end up spending way more money on interest.

If you have multiple cards, make paying off the card with the highest interest rate the priority. If you have the opportunity to consolidate your credit cards and receive a lower rate, also take advantage of this. The biggest key is to use debt wisely. The longer your balance is greater than zero, the more interest you end up paying.

Credit 101

But how exactly does interest work when you don’t pay off debt during the grace period? Here’s a good guide on how interest for credit cards work. But essentially, you accrue interest each and every day that your balance isn’t zero. And the interest that you’re charged is compounded daily opposed to yearly, meaning that it’s actually a bit more expensive than your APR.

Any time you start a new month, or billing cycle, that interest that you haven’t paid is tacked on. If you paid off a slice of your balance throughout the month, but still didn’t get your balance to zero, you’re charged based on an average daily balance. Essentially, how big was your balance on average throughout the month. Once again, the quicker you pay, the less you pay.

Make it easy on yourself and pay off your balance during the grace period. You can build your credit without making big purchases. And many people learn the hard way that having bad credit kills you in the end. A bad credit score follows you everywhere that you go.

Garrett Ransom

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Faith, Family, Wealth, Data Science, Tech, and Culture.

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