Credit cards are the best way to manage your finances if you use them judiciously. You can purchase products and services using your credit card. You will have to pay no interest if you make your repayments on time and in full. But, if you miss your repayments, you have to bear the interest charge. A credit card interest rate, also known as the finance charge, is a rate on the amount you borrow. It varies across issuing banks and the type of credit card you own.
How Are The Credit Card Interest Rates Calculated?
Your credit card interest rate is calculated based on the Annual Percentage Rate (APR). APR is calculated for the whole year rather than every month. Also, banks consider the monthly percentage rate (MPR) to determine the interest for the monthly transactions. Both the credit card interest rate vary from lender to lender and the type of credit card you have. While applying for a credit card, it is crucial to ask your issuing bank about the applicable APR on your credit card.
When Do You Have To Pay Interest Charges on Your Credit Card?
There are a few situations wherein you will have to incur interest charges on your credit card transactions;
- When you are unable to pay the outstanding dues within the assigned due date.
- When you pay the minimum due amount.
- When you pay less than the minimum due amount for the month.
- When you opt for a cash advance, it means that you will have to pay interest for using your credit card to withdraw cash from ATMs.
- When you carry last month’s due amount to the next month. If you pay your credit card’s outstanding balance before the due date, you will have no interest charges to bear.
What are The Factors Influencing Credit Card Interest Rates?
Your credit score is one of the crucial factors in your interest rate calculation. The issuing bank considers your credit score before deciding your credit card interest rate. Here are the other actors that affect your interest rate:
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Payment History
Your payment history indicates your ability to repay the dues and creditworthiness. If your credit card issuer is satisfied that you have been disciplined with your repayments and have no outstanding dues, it will increase your credit score, and you will also be able to avail of a lower interest rate. On the other hand, if you have missed your payments, your score will reduce, and the interest rate payable on your credit card will be higher.
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Credit Utilization Ratio
Another factor influencing your interest rate is the credit utilization ratio. It indicates the credit you have used against the credit limit assigned to you. Having a lower credit utilization ratio shows that you have used your credit card responsibly. A lower credit ratio increases your credit score and lowers your interest rate and vice versa.
Besides the above-said factors, the length of credit history and the types of credits you owe also affect your credit score and credit card interest rate.
How to Avoid an Increase In Your Interest Rate?
Your issuing bank will send an interest rate increase notice when you miss your first payment. You have the option to opt-out of the new interest rate and continue with the old interest rate. You will need to submit a request to your bank within the 45-day notice period. It is worth noting that the bank may decide to cancel your credit card if you choose to opt out, but you will not have to pay the higher interest rate.
Avoid Paying Interest on Your Credit Card
If you want to avoid paying interest, make sure to pay your credit card balance on your credit card statement each month on and before the due date. The benefit of paying your balances on time is that you will not have to incur any interest charges or penalties.
However, keep in mind that you will not be able to avoid paying interest on cash advances or balance transfers. The reason is that they do not have a grace period to avail of. Therefore, the best course of action for you is to pay your credit card balance off quickly.
Final Word
credit card interest rates may seem complicated to deal with, but it is not difficult to understand. The more you know about credit card interest rate, the better you can manage it and save a significant amount of money in the long run.
