How is interest charged on a credit card?

When you sign up for a credit card, youโ€™ll likely see a percentage next to “APR” which stands for “annual percentage rate.” This value is the amount of interest youโ€™ll be charged on a yearly basis if you open that specific credit card.

Most credit cards will have varying APRs, depending on the prime rate set by the Federal Reserve, as well as your credit history. Most credit cards will only charge interest on any amount you borrowed but failed to pay back in full at the end of each billing cycle.

If you do have a balance left on your card at the end of the month, the credit card company will multiply the balance by a daily interest rate. The daily interest rate used is your APR divided by 365. Using the credit card interest calculator above, generate your principal and interest like any other type of loan.

How can I avoid interest on my credit card?

Paying your credit card balance in full at the end of every billing cycle is the only way to avoid interest charges. If you are unable to pay back the full amount, consider paying as much over the minimum payment as you can.

If you can pay your balance back in full, itโ€™s even better than investing that same amount. Then, you can keep low monthly balances, leaving future funds free to invest in other ways.

Is credit card interest monthly or yearly?

Credit card interest can get confusing because APRs are expressed as a yearly percentage, but interest is added to a monthly amount. Even more complex, some companies use a daily interest rate to determine what you have to pay in interest.

For instance, if you have a credit card with an 18.4% APR, you have to divide that amount by 12 months to get an idea of what your monthly interest rate is. That comes to roughly 1.53% on a monthly basis. If you have a $200 balance at the end of the month, youโ€™ll be charged 1.53% interest on that amount, for a total interest charge of $3.06.

Though this example makes it seem like interest charges are low, keep in mind that the totals pile up quickly. You can easily start to fall behind on payments if youโ€™re not careful.

What is a good APR for a credit card?

Credit card APRs are typically the first APR schemes people encounter. APRs for credit cards are always advertised by the credit card company but are known to change depending on the type of charge. For instance, the APR charged for purchasing gas may be different from a cash advance on the card. 

In general, a good APR for a credit card is below 14%. People getting their first credit card or those with a low credit score will likely have a credit card with an APR of 20% – 24.99%. 

Lenders, like credit card companies, will use low introductory APRs as a way to entice new customers. In these situations, new credit card holders may enjoy the first year with 0% APR but then see their APR increase to 20% or more in the second year. 

What happens if I miss a credit card payment?

Forgetting to pay your credit card bill on time is one of the fastest ways to start lowering your credit score. Being late on a payment by a day or two probably wonโ€™t have horrible consequences but going weeks or months without paying is a big deal.

Payment history makes up for 35% of your credit score, and credit card payments are a major driver of your payment history. You have 29 days to realize that you missed a payment before it goes on your credit report. Even if you are able to avoid it showing up on your credit report, your credit card company will likely charge a late fee.

If your payment is over 30 days late, it will be reported to the credit bureaus, where it can then stay on your credit report for up to seven years. Even just one late payment can cancel any promotional APRs and drive your interest rate to the highest level possible.

Should I get a card with a promotional APR?

When youโ€™re comparison shopping for a new credit card, youโ€™ll want to find the lowest APR possible. However, itโ€™s important to keep in mind that many credit card companies offer extremely low APRs for the first year, only to shoot them way higher after the promotion ends.

Look for steady APR rates that you can afford in the long term, even if the promotional rate looks amazing. Promotions donโ€™t last, and you donโ€™t want to close out a credit card after only a year of having it open.