Here's how it works. Credit cards charge interest on any balances that you don't pay by the due date each month. When you carry a balance from month to month, interest is accrued on a daily basis, based on what's called the Daily Periodic Rate DPR.
DPR is just another way of saying what your daily interest charge is. That's calculated by taking your credit card's Annual Percentage Rate APR and dividing it by , for all the days in the year. The reason why credit card balances can quickly build up on cards with high APRs is because of compounding interest charges that occur on a daily basis.
At the end of each day, the interest charge is calculated and added to your balance for the next day. This continues every day for the billing period, so the interest you're charged one day becomes part of the balance on which interest is charged the next day, and so on. At the end of the month, the lender will add up all of these daily interest charges and put it on your card as a finance charge.
Most credit cards provide an interest-free grace period of around 21 days — starting from the day your monthly statement is generated, to the day your payment is due. However, if you don't pay it during that time, an interest charge will go into effect and you will end up with a balance that rolls over to the next month. Interest is charged on a monthly basis in the form of a finance charge on your bill.
If you have a revolving balance, you will lose that day interest-free grace period on purchases. Interest will accrue on a daily basis, between the time your statement is issued and the due date, which means that you'll have an even larger balance due, even if you haven't used your card during that month. Even though your payment isn't due until September 30, interest will be accruing every day between September 1 and when you pay it, because you've lost the grace period.
Interest charges are complicated, and credit cards can become expensive financial tools if the balances build up over time. Understanding how interest is accrued on the card can help you understand more about how your payments are being applied and help you pinpoint methods for paying off your cards. Understanding how the interest rate and APR work can make all the difference in controlling your debt. Here's a on how credit cards and APRs work. A higher purchase APR annual percentage rate means you will owe more in interest if you carry a balance, while a lower purchase APR means you will owe less.
Yet with most credit cards, you can avoid paying interest completely. Interest charges will accrue on these unpaid balances.
And, if you pay less than the minimum payment, you can also end up with late fees. To avoid a finance charge , all you need to do is pay off your statement balance in full by the time your credit card bill is due every month.
You can do this when you get your statement in the mail, or any time before the bill is due. Most credit card issuers will let you connect a checking account and schedule automatic drafts to pay the full statement balance on the due date. To help illustrate this idea, imagine you have a separate checking account from your main account. Every time you make a credit card purchase, you could transfer that same amount into your second checking account.
At the end of the billing period, your second checking account should have the exact funds needed to pay off your credit card statement balance in full. But this could help you think about setting money aside to pay your bill. While most credit cards work as described above, not all credit cards do. Make sure you read the terms and fine print for your card to find out how its grace period works.
Aside from allowing you to use credit cards interest-free, paying off your statement balance each month will help minimize your credit utilization. Credit utilization is the relationship between the total amounts you owe aka credit card balances versus your overall combined credit limits. A low credit utilization rate can benefit your credit scores considerably. To become an expert at understanding your credit card bill and avoiding interest, read our guide to How Paying a Credit Card Works.
Also, watch out for the terms of your card. The bank will usually charge a fee to transfer a balance, too, unless there is a special promotion. Unlike regular purchases, interest will begin accruing immediately on cash advances. You also have a variable purchase APR of Credit card issuers are not required to offer a grace period.
The good news is that many still do. And if your card has a grace period, the issuer must ensure that bills are mailed or delivered at least 21 days before the due date. A fixed APR typically remains the same, but it can change in certain circumstances, such as if your payment is more than 60 days late or when an introductory offer expires. Many variable interest rates start with the prime rate, then add a margin.
The result is your variable APR. If you have excellent credit generally scores of or higher , you may be more likely to qualify for a lower interest rate because a credit card company may consider you a lower-risk customer.
You can also read your cardmember agreement to learn more about interest rates and fees. The good news?
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