Whether we like it or not, interest is a part of our lives. You hear about it when you open a bank account, sign up for a credit card, or take a loan. Furniture stores and car dealerships even have special events with low interest rates, or don’t pay interest for a year. While it is a part of our everyday lives, interest can unfortunately be a difficult thing to properly understand, and many of us end up paying a lot more for the stuff we buy than we should have to. Here’s everything you need to know about credit card interest.

What Is Credit Card Interest?

Credit card companies make money in two ways. The first is through the fees they charge businesses who accept credit cards as a method of payment. Many businesses have been complaining over the last couple of years about how much those fees are and are wanting it to be lowered. The other way credit card companies make money is through the fees they charge you, including interest.

Interest is typically shown as an annual percentage rate, also known as APR. The APR can be different with different cards, meaning one credit card could charge 12.99% interest while another could be 20.99%. In many cases the purchase APR is lower than a cash advance APR too. It all depends on the card, so make sure you understand yours before carrying a balance on it.

How Credit Card Interest Works

First off, keep in mind that you will only be charged interest if you don’t pay your credit card bill in full each month. If you carry a balance, the credit card company charges interest on what you still owe and adds that amount to your bill. In other words, if you don’t pay off your balance the next month, you will be paying interest on top of interest. This is how credit card balances can get out of hand.

The other thing to keep in mind is that the APR is a yearly rate, and since you are billed monthly it’s beneficial for you to find out how much interest you will be charged per month. For instance if your APR is 12%, that means you would be paying 1% interest per month. So if you have a balance of $1000, at the end of the month you would owe an extra $10.

What Is A Good Interest Rate For A Credit Card?

Interest rates can vary, and finding one with a low rate can take some time to find. There are low interest rate cards, but they usually don’t come with the same perks other credit cards have such as travel rewards and cash back. They also usually have an annual fee as well. You can find cards with rates as low as 11.99% though, and if you are looking to start saving money and lowering your debt, it might be a great place to start.

How You Should Pay Your Credit Cards

Paying the minimum on your credit cards each month is a good way to spend a longer time paying off your debt. Even an extra $10 a month can help you save money over time, and pay of your debt faster. In many cases it adds up to hundreds of dollars and several years. The more you can pay the better, but of course paying off the balance in full is the best thing you can do.

Paying off your credit card in full every month means the price you pay for your goods and services is exactly what you thought it was. When you start paying interest on things, the cost of it goes up. That $1000 sofa can quickly become a $1200 sofa. Many people unfortunately end up paying interest on things long after they’ve stopped using them. In other words, when you have some extra cash, it’s almost always a good idea to use it to reduce your credit card debt to cut back on the interest.

Another strategy many use is transferring their credit card balance to a balance transfer credit card with a lower interest rate. Many of them offer promotional periods where they don’t charge interest on the balance for a defined period of time. This can help you get a little further ahead in the long run.

Always Keep In Mind

While credit cards can be useful, they can be a debt trap. Interest can continually build up, and make paying off your credit card harder and harder. Whenever possible make sure to pay off your credit card bill every month, but if you can’t, always try to pay more than the minimum. Of course you should always pay attention to the fine print to make sure you are getting the best interest rate possible.

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