Of all the positive aspects that come with having a credit card, such as:
… there are some negative aspects.
The payment of annual fees, currency exchange rates and APR charges are all features without which we could live even if we tolerate them. It is a packaged deal, after all.
And although we accept the inconvenience to obtain the benefits, there are some things that you should not accept as a second nature, such as interest charges.
Because it is not just a one-time thing, you can make relatively manageable credit card debt much more serious and more difficult to eliminate. The best part of interest charges is that they are avoidable when you know how they work.
So let’s review some of the basics when it comes to credit card interest rates so you can avoid your trap at all costs.
Credit Card Interest Rates
In the United States, APR credit card rates are generally set as a range. The range is based on the preferential rate, the established ranges of the issuer and its solvency.
This means that most credit cards have a minimum APR rate (if you have an impeccable credit) or a maximum APR rate (if your credit is very low). And when the Prime rate increases, that means the minimum and maximum APR rates also go up.
Most APR rates can vary from prime + 3.65 to prime + 23.74.
How interest rates are calculated
Although your APR is expressed annually, it is usually calculated at the end of each month.
To know how much you pay in interest, you must convert your APR (annual percentage rate) into a monthly percentage rate.
As an example, if you have a credit card with an annual percentage rate of 22%, you can divide that number by 12 to get the approximate monthly percentage rate.
22% / 12 months = 1.83%
And if you have a balance of $ 2,000 from month to month, for example, you will incur fees of $ 36.66.
$ 2,000 * 0.0183 = $ 36.66
If you only make minimum payments, it’s easy to see how debt can get out of hand quickly.
It is also important to keep in mind that the credit card interest is aggravated, which means that your interest charges are added to your account balance and, if not paid, end up being calculated in the interest charges of the following month from that total.
Using our previous example, your new balance after 1 month would be $ 2,036.67.
Interest charges on that balance are now $ 37.27
$ 2036.67 * 0.0183 = $ 37.27
Then, after 2 months, your new balance would now become $ 2073.94.
What this means is that, for an unpaid balance of $ 2,000, you would incur $ 73.94 in charges in just 2 months without even making another purchase.
Credit Card Interest Calculator
Now that you have the basics covered, let us introduce you to our credit card interest calculator.
You can easily dial some numbers to find out:
- exactly how much interest you are paying,
- how long will it take to pay your credit card balance, and
- how much could you save with a low interest credit card.
All you have to do is write down how much you currently owe on your credit card, your current APR rate and your typical monthly payment.
The interest calculator will tell you (in number of months) how long it would take to pay your balance in full.
And if you move the “New interest rate” slider down, the interest calculator will inform you how much money you could save on interest payments with a lower APR credit card.
Low APR credit cards
So what options are there for credit cards with low APR?
Well, if you have an excellent credit rating, some regular credit cards offer APR rates as low as Prime + 3.65.
the , for example, it will offer just that. It also offers special benefits for military and some shopping and travel insurance. (Just keep in mind that this card is only available to USAA members).
However, if you have poor credit, the interest rate can skyrocket up to Prime + 20.65.
Making sure your credit score is on par is a great way to avoid paying more than you owe and ultimately save more money in the long run.
Or, another great low APR option is the , offering a single APR rate instead of a range: prime + 8.74%. In this way, you can not guess what your APR rate will be.
Credit Card Balance Transfer
If your credit is less than favorable, perhaps taking advantage of a large balance transfer promotion is enough to reach the mainland.
the and the They are 2 of the best options for balance transfers, offering new cardholders 15 months and 18 months of 0% APR, respectively.
However, it is important to keep in mind that the best way to take advantage of a balance transfer promotion is to concentrate on paying your balance instead of making purchases with these cards.
That way, you will get to the root of your debt instead of increasing it.
Debt is a slippery slope
APR charges can be a hard pill to swallow. Basically, you are giving money to the banks with nothing to show.
That is why it is important to be aware of your credit card payments and your credit score so that you can use your earned money with effort for the things you really need and want.
Have you ever had to overcome a large amount of credit card debt? How did you get out of that?
Let us know in the comments below.