How does interest accrue on a credit card?
The interest rate on a credit card is a payment to the bank for the finances provided. You don’t have to know the exact formulas and figure out how credit card interest is calculated. You can use a special credit calculator or ask a bank manager to make preliminary calculations. But it certainly does not hurt to have this kind of knowledge. They will help you better understand how credit cards work, and, accordingly, to understand how not to overpay.
Basic rules for credit card interest charges
There is a fixed date by which you need to make a monthly payment. The bank sets a minimum amount that must be repaid in any case. Otherwise, penalties will increase. It is possible to pay more – but this is not an obligation of the client, but only his right.
The minimum interest is an amount between 3 and 10 percent of the total debt for the reporting period.
The fee is made up of two components:
- A portion of the principal debt;
The amount of accrued interest depends on the size of the interest rate and on the debt.
By the way, you should understand that the interest rate indicated by banks on advertising brochures – is only a minimum value. The exact figure can be found out only after an individual consultation. The rate offered by the financial institution depends on:
- the solvency of the client;
- the package of documents submitted;
- credit history.
In addition to paying the interest rate, you also need to pay other fees:
- annual maintenance;
- cashing out money at an ATM;
- depositing money into an account, etc.
How do I calculate my credit card interest?
There is a special formula for calculating, by substituting the data to which you can get approximate data. The exact figure can be obtained only at the bank.
What is the formula for the calculation?
Interest = (monthly expenses x interest rate) / number of days in a year x number of days in a reporting period
This formula may not work for all financial institutions.
In order not to bother with the independent calculations, you can use the automatic online calculator. After collecting the data, the device itself will calculate everything and show the final figures.
When can I not pay interest on credit cards?
Some credit cards have a grace period. This is a certain number of days when you don’t have to pay interest, but only the principal. A few years ago these offers were rare, but now credit cards with a grace period are available at almost every bank.
How does the grace period work? The minimum period without interest payment is 30 days. Average – 60 days. But there are cards with a period of up to 200 days. During the grace period it is necessary to pay the debt in full. Then, interest will not be charged, and the grace period resumes. If there is a delay, then you have to pay the debt at the bank’s specified rate. This rate is 10-20%.
The grace period does not apply to all card transactions. Additional fees will have to be paid for:
- withdrawing money from ATMs;
- money transfers to other individuals;
- transfers to electronic wallets and other operations specified in the rules of card use by the bank.
Why do banks need it? Initially such offers allowed to attract new clients due to the obvious benefits. Now the lack of such cards in the lineup will be a significant competitive disadvantage. There are no pitfalls to the grace period. No additional fees if you pay your bill on time.
How can I reduce my credit card interest?
If you already have a card with a high interest rate, there is only one way to save money – to apply for refinancing. That is, take out a new loan on more favorable terms. With refinancing you can pay off several debts at once, including credit cards and consumer loans, and pay only one with a lower rate.
- If you are still in the process of choosing a card, you can lower your interest rate in the following ways;
- Look for cards with a grace period;
- Provide a certificate of income. In addition, you can show the manager a copy of the employment contract or contract of work;
- Take care of your credit history;
- Agree to a voluntary insurance program offered by the bank;
- Look for cards with special offers for new customers or one-time promotions.