Credit Card Interest

Credit cards are similar to loans: every time you use them, you’re borrowing money. Of course, if you pay off your statement balance — the amount of credit you’re using on the card — in full every month, you won’t have to worry about interest. But if you’re carrying a balance, you will have to deal with credit card interest. In this brief explainer, we’ll take a closer look at how credit card interest works and ways to use your credit cards to avoid paying it.

What Is Credit Card Interest?

Interest is the cost of borrowing money from lenders. It’s expressed through an annual percentage rate or APR. Although interest and APR are not always interchangeable terms, they are basically the same when it comes to credit cards. Simply put, the interest rate is stated as a yearly rate or APR. The average APR of credit cards is between 15% and 23%.

When Is Credit Cards Interest Charged?

You don’t owe any interest as long as you pay off your statement balance in full monthly and have no pending prior charges. If you can’t afford or forget to pay the statement balance in full, you will be charged some amount in interest.

If you continue carrying a balance from month to month, the interest will accrue on a daily basis. It is also known as the daily periodic rate or DRP, which is calculated by dividing your credit card’s APR by 365 days. For example, if your APR is 18%, your DPR is 0.0493%.

How to Avoid Paying Credit Card Interest?

As with other loans, the better your credit card score, the higher your chances are to qualify for a credit card with lower interest rates. Of course, this is not always the case, but fret not, for we have created a brief compilation of simple tricks and tips to help you avoid spending a hefty sum on your credit card interest. Let’s take a closer look at some of them.

• Pay your balance in full every billing cycle. This straightforward approach will allow you to avoid paying pricey interest. To pull it off, you need to pay your balance in full every month so you don’t owe any interest.
• Consider 0% introductory rate credits. 0% APR credit cards are a godsend: they offer no interest for 6 to 21 months. Remember that when the promotional period ends, you’ll have to pay the standard APR for this credit card type.
• Don’t make large purchases. If your credit card history is less than spectacular and you fail to make your payments on time, avoid making big purchases with your card, as you risk compounding your interest charges.

To wrap it up, credit cards don’t feel as tangible as your cash, so they often incentivize their owners to spend beyond their means. Such an impulse-driven approach will lead to ever-increasing debt and a bad credit history. To avoid such a financial bummer, attempt to pay your balance in full every month, circumvent major purchases, and consider getting a credit card with a 0% introductory rate. These easy-to-follow approaches will help you avoid a debt spiral and keep your balance in check.