Get your APR down to get a handle on your card balances. (Photo: Shutterstock)

In the Interest of Things: Navigating Credit Card Interest Rates

Carrying an unpaid balance on your credit card can easily become your downfall. This unpaid balance accumulates in your account and if unpaid, the consequences are many. If you are not careful, the interest rate coupled on top of a really high balance, can really drag down your score.

In addition, understanding credit cards is not exactly a walk in the park. However, knowing your interest rate and how to keep it low may be the difference between a great credit score and staying in debt.

So, you ask, “How do I do whatever this is you’re telling me?” Lucky for you, that is what we are going to share with you here. 

Now let’s get to it. 

What is an Interest Rate? 

Before we start talking about the technicalities of your credit card, let’s make sure that you understand how interest rates work.  

Interest rates are essentially the premium that you pay for your card to issue credit within your billing cycle. Most credit issuers stipulate different rates for retail purchases and cash advances. You should confirm with your card issuer your rate. By confirming your interest rate, you will be prepared in the scenario that you have these charges listed on your billing statement and account for their origin. 

At Save The Bucks we always advise that you become a credit-card deadbeat and pay off your entire balance in full every-single-month. The truth is, that for many this is not always feasible. Even those amongst us who have the best money management habits and credit scores may fall behind every now and again. The key is, however, to not let yourself fall too far behind. In the case that you cannot pay off your balance in full,  you will still need to pay something. While the minimum payment amount provided by most credit issuers is offered as a coutesousy, you should aim to pay off more.  You will want to pay off the maximum amount possible where you still have money to cover other needs and expenses (check out more ideas for  paying off your credit card here). This way, you can to avoid any interest charges or late fees accruing on your credit card billing statement.

Interest kicks in when you don’t pay your card in full. Simple interest will then accrue daily on your balance until the end of your billing cycle when your statement is due. Simply put, you will need to pay the credit card provider an additional sum on the money you borrow within your billing cycle. And again, the only way to avoid these fees is by paying your balance in full every month.

The interest on your card statement is generally expressed as an annual percentage rate (APR). Most credit cards average between 22.99%-24.99%. A high FICO® can often get you a much lower rate. On the other hand, a lower score may leave you limited in credit cards that offer a competitive rate. In fact, some subprime credit cards can charge as high as 35% APR!  Consequently, a higher purchase APR means that you will end up owing a whole lot more at the end of the month. This is why it is important to seek out a low-APR credit card that will help you to build your credit portfolio and maintain responsible habits. You should never get a card that will charge you high interest and fees that put you in more debt.

How to Calculate and Manage Your Interest Rate

Find the APR on your credit card statement

Usually your credit card APR will be provided at the end of your monthly statement. This can be found under a section marked as ‘Interest Charge Calculation’ or something along those lines. 

This section allows you to see how much of your balance will be spent in calculating your monthly interest charge. Your interest goes up daily on the unpaid balance, and this accrued interest becomes part of your total balance. 

Know the terms and conditions

Knowing your credit card terms and conditions thoroughly before signing up is always a good idea. While it may be a bit cumbersome to go through all the small print, the process is essential. Going over your tems allows you to avoid surprises regarding fees or certain insurances and price protections on your card. You can even find the annual percentage rate listed near the top of the card’s terms and conditions.

Also keep in mind the different types of APR that your card might have. 

Some categories may include:

Purchase APR –  this applies to your overall card purchases

Balance Transfer APR – this applies to the balance transferred from another credit card

Introductory APR – this applies to the purchases you make during the promotional period

Calculate your DPR

While your APR is the given annual interest rate of your card, the DPR (daily percentage rate) is the daily interest amount. To find your daily interest amount, you need to divide the APR by 365. 

For example, you have an APR of 10.50, so you divide it by 365. This would give you your DPR of 0.0287%. Your card issuer may use 360 days instead of the former, so it’s best to confirm this with your issuer.

Determine your average daily balance 

Next, you need to know what your average daily balance is. This may be harder than what we did above. 

The first step you have to take is to go back. Look at your statement and find out what the final balance on each day of the month was. If you always pay your purchases fully by the due date, you won’t have to worry about the average daily balance. Otherwise, it would be best if you tracked your charges and credits.

Add the amounts to get your statment total 

You can figure out how much you owe daily by multiplying your DPR with your average daily findings. 

Next, multiply this interest with the number of days in the statement cycle. Take these findings and add them up with your monthly purchase amount. 

The Takeaway 

Keeping a check on your card and interest rate should not take too much time after you have gotten familiar with the details.

Depending on the card you choose, you may be able to negotiate a lower initial interest rate. If you have kept a high credit score, low DTI ratio, and other good money management habits, then you will likely get approved. So, what are you waiting for? It’s time to get give your credit score and money management skills a boost!

Share on twitter
Share on reddit
Share on linkedin