Understanding credit card interest
What’s credit card interest?
It’s the fee your credit card company charges you to borrow money on your credit card. This charge is known as the annual percentage rate, or APR.
Expand your financial vocabulary
Billing cycle: The period of time between your monthly credit card bills. Purchases, credits, and interest charges will be added to or subtracted from your balance throughout the billing cycle.
Credit card statement: The monthly document you receive when the billing cycle ends, which shows all outstanding charges and fees.
Payment due date: Each statement has a due date that occurs roughly 20 days after the billing cycle ends.
Grace period: The time frame between the end of a billing cycle and the payment due date.
How to calculate (or avoid) paying interest
To calculate your interest charge for a billing cycle, follow this formula:
Step 1: Divide your APR by the number of days in a year (365) to get your daily periodic rate (in other words, the amount of interest you get charged during each day of the billing cycle.)
Step 2: Multiply the daily periodic rate by your average daily balance (the average balance you carry during each day of your billing cycle) to get your daily interest charge.
Step 3: Multiply your daily interest charge by the number of days in your billing cycle.
Remember: credit card issuers only charge interest if you hold a balance from one billing cycle to the next. If you pay your balance in full, you won’t have to pay any interest.
Credit cards can be helpful, but they can also be a gateway to debt. Before applying for that shiny piece of plastic, make sure you understand how credit card interest works and how it affects you as a cardholder.
Chief Financial Credit Union has great credit card options at an introductory 0.00% APR* for the first 6 months when you feel ready to to begin!