Do You Understand Credit Card Interest?

By Author: Jennifer Baxt
Total Articles: 200
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It is very important that as a credit card holder, you understand credit card interest rates. Credit card interest rates are not as simple as simply charging interest on your credit card purchases as in four percent on whatever you owe. It is a bit more complicated than that and the inability of many people to understand this is what leads them to getting deeper into debt. Credit card interest can add up quickly and create a vast amount of debt before you know what has happened.

Typical interest rates can vary immensely and often it depends on what the credit card loan is secured against. If the credit card is secured against a home, the interest can be as low as six percent. An average credit card interest rate is about 12 percent. That being said, depending on your credit history and the risk associated with giving you a credit card, you can have an interest rate as high as 36 percent, which means that you owe 1/3 of everything you buy on your credit card each month. If you spend $300 on your credit card, you pay $100 in interest that month. That is a lot of interest.

Credit card interest rates are usually expressed ...
... in terms of annual percentage rate, which is compounded daily or monthly. While it has the word ‘annual' in it, it is not an interest rate that is paid over a stable balance during the course of a year. The interest is compounded over the course of a month to get a more accurate representation of money owed on interest. If you make a $100 purchase on your credit card and pay it off a week later, before the billing period is completed, you would not pay interest on that purchase if it was not for the APR. However, if it is charging APR so that it is a daily representation, the credit card company can collect interest on that purchase, even though you paid it off.
APR interest rates can be relatively low, but sometimes it can get as high as 29.99 percent for daily compounding and 34.48 percent for monthly compounding over 12 billing periods and 365 days.

Thankfully, there are laws in place to prevent you from paying excessive interest on your credit cards even if you have good credit. Usury laws limit the amount of interest that can be charged and keep the interest rates strictly regulated so that there is a system in place for the agreement of interest rates, the calculation of interest rates and the discloser of interest rates. The United States has relatively strict laws for usury, but some countries, especially in the Middle East, have laws against charging any interest.

Interest rates exist to provide money to credit card companies so they can loan you money. They want to make a profit and interest rates are how they do it. However, they can be a thorn in your side so if you want to keep yourself from falling behind on interest rates, understand them and you can protect yourself when you make your credit card purchases.

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