When Credit Card Companies Charge Interest

Most of us can appreciate the security of having a credit card at our disposal, and for the most part, it’s a right a passage. It’s a plastic card that affords us the luxury of “buying now and paying later” and makes the process of disputing fraudulent charges much easier when compared to other purchasing methods.

That being said, with great power comes great responsibility; after all, it easy to spend what we technically do not have, leading us down a rabbit hole of enormous debt. In fact, the majority of credit card debt is tied to high-interest rates.

There is no denying that a credit card has its benefits, but it is crucial that you understand how interest rates are calculated so that you can better manage your spending and avoid the financial pitfalls typical of high credit card debt.

WHEN CREDIT CARD COMPANIES CHARGE INTEREST

To better manage credit card debt, it is vital that we understand interest rates and, more importantly, the role interest plays when it comes to billing. Whenever you make purchases using your credit card, you will be confronted with the option of paying off your balance in full or making an installment payment, which is money paid in small amounts over a fixed period of time.

If your budget allows, paying off the balance in full is a great way to avoid interest altogether. Conversely, if you’re making installment payments, you’re encouraged to examine your credit card agreement to find out what your interest rate it, especially since, over time, you will be paying the total cost of your purchase plus the compounded interest.

WHAT TO EXPECT WITH INSTALLMENT PAYMENTS

It’s important to note that by law credit card companies are required to provide you with an interest-free grace period, typically 21 days. The caveat, however, is that you must not have a balance at the beginning of your billing cycle. In layman’s terms, this means that you would not have to pay interest on your purchase provided you pay before the close of the billing cycle, of course. Basically, you pay for what you bought and nothing more.

That said, if you’re paying late, or if the interest-free grace period has expired, you will be subject to the interest charge specified in your credit card agreement. The same holds true if you have a balance that was carried over from a previous billing cycle. Also, you may incur a late charge for any late payments.

HOW INTEREST RATES ARE CALCULATED

We’ve all been there, right? So excited to get our first credit card that we don’t take time to thoroughly read over the credit card agreement. And we should, the information contained in these agreements can save us a lot of money, not to mention heartache. Most credit card companies actually calculate their interest rates based on a daily periodic rate, which is the sum of your APR divided by 365 days.

WHAT HAPPENS WHEN A BALANCE IS CARRIED OVER?

For many people, paying off an entire credit card balance is not a viable option. So, what happens if you pay on time but haven’t paid off the entire balance? Well, in this instance you would only have to pay interest on the balance, which would be applicable until the end of the billing cycle.

AVOIDING HIGH INTEREST

The best way to avoid high interest is to shop around; you may find that some companies have a lower interest rate than others. However, if you’re already locked into a less than desirable rate, you can try to find another credit card company whose interest rate is lower, and if you do, you can transfer your balance to the new credit card company. In this case, you will pay a lower interest rate on the amount that you still owe.

CREDIT CARD PENALTIES

Although it seldom discussed, many credit card companies will penalize customers who routinely make late payments, often by increasing their APR (annual percentage rate). If this occurs, it will not only negatively impact your credit but also increase your minimum credit card payment. Therefore, you’re encouraged to pay your credit card bill on time.

In summation, there are a lot of things to consider when owning a credit card. It’s important to note that it is not free money. It is, instead, a loan that you will have to repay; so, be cautious with your spending and, most importantly, take a few moments to read over your credit card agreement and review your options. There are times when finances are tight, and a short-term loan may be appropriate for your individual needs.

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