By David
Have you ever found yourself wondering what the annual interest rate of your credit card meant for your credit card spending, or perhaps how card companies calculate interest and why they do it that way? If you are looking for answers to these types of questions, you have come to the right place. Below we will explore the idea of the annual interest rate and how it affects your credit card bills.
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The Annual Interest Rate
The annual interest rate credit card is the same as its APR or annual percentage rate. This rate determines how much interest you will be charged over the course of an entire year. Not surprisingly, the higher this rate is, the more interest you are charged and the more you ultimately end up paying for your purchases.
The Grace Period
One very beneficial feature of a credit card, and interestingly enough, one that can help you to avoid the annual interest rate of your credit card is the grace period. This is typically a 30-day long period that you get after you have made a purchase where you are not charged interest. This allows you to buy things on your card in order to build credit, earn rewards, or just balance an uneven income and then pay them off before your 30 days are up.
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Interest Calculation Methods
Despite the fact that the annual interest rate credit card does include the word annual (or yearly), interest is in fact added on your purchases every day you maintain a balance on your credit card after the grace period. Because of this you end up paying more over the course of the year than your interest rate would lead you to expect. Thankfully since it is an annual rate being applied daily, it is necessary for card companies to divide this percentage by 365 (the days in the year) to find the daily percentage rate. You can do the same thing. Suppose your credit card has an APR of 15% you can divide this by 365 to determine your daily rate.
The equation would look like this: 15/365=0.0410958904109589 or 0.04% if you prefer to round it. So if you spend $100 on your card, on the 31st day of maintaining that balance you would be charged $0.04 in interest. The benefit for the card companies is that this interest is then added to your principle and gains interest as well, so on the 32nd day you’d be charged 0.04% interest on $100.04. This is called compound interest and it tends to add up quickly. Because of this it’s important to pay off your credit cards as quickly as you can in order to save as much money as possible.
Now that you have seen what the annual interest rate of your credit card is and how card companies calculate this interest, you can make informed decisions about when and how to best use your credit cards.
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