Credit Card Basics: How Are Interest And Charges Calculated

First time credit card users are the most excited individuals on earth. Why is this so? They feel they are on top of the world since they can now enjoy the privileges of buying whatever they want, and anytime they please. But not all of these individuals see the problems that loom in the future just because they were not too careful enough in finding the right credit card deals.

Once there is carelessness in handling your personal financial matters, the only way to go is bankruptcy. Of course, you wouldn’t want to end in that situation, right? So, the best thing is to see clearly how these credit cards work and how they can work positively for you.

How interest payments can you lead to poverty

Among the most important things you need to know is how charges and interest rates are calculated before you deciding on which credit card you are to apply for. You may not know it but there are some techniques other users employ to know which credit card company works best for them. However, these two aspects mentioned are the ones that can make or break your purse.

Interest payments alone can damage your budget and if this goes on and on and you still keep on buying mindlessly, you would end up a pauper in no time. Below are steps for you to take.

Opt for Periodic Interest Rate Scheme

Annual interest rates mislead every credit card user if they are not smart enough to detect the difference between yearly and periodic rate system. Interests are actually charged daily. Finding the rate is easy:

Divide Annual Percentage Rate (APR) by 360 days or 365 days. (banks use different number of days). Example: 20% divided by 360 = 0.055% per day. This is a small amount but adding it up to a year’s time means so much. This amount is to be considered as your daily periodic rate. So, you can think about how the amount sums up.

Learn about average daily balance

If you pay some amount you have incurred on your credit card earlier than the scheduled payment date, you get credit for that. Interest charges are based on your unpaid balances, carried over from your previous charges. Interest will be then calculated depending on your average daily balance.

Therefore, any amount like $500 unpaid for the first ten days accrues interest. The longer the time you pay for this amount, more interests are due together with the actual amount you owe.

Sum it up

To know how much interest will be charged on you the next month, you can multiply the average daily balance with the number of days there is in a particular month. In this case, if you have a balance of $550 x 0.055% x 31 days = $937.75. Take note that the interest amount you have to shell out is in reality higher than that of your APR. This shows that the rates are compounded and this leads to a not so good situation for you.

How Credit Cards with Low APR Can Help

There are so many credit cards that you can use but you may not qualify for all of them. It is the credit history banks are looking at and that is where you APR is determined. If there are companies that offer low APR or to the max, 0%, this can be availed if you have a good credit standing. To know more about this privilege, you have to ask a credit card expert to get some advice on credit card deals.

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