Which Payment Option Could Have Interest Charged To You?
Which payment option could have interest charged to you? Well, in just two words, the answer is Credit Cards. Yes, for every payment you make with your credit card, the issuing company will charge interest over it.
There are mainly two ways in which credit card companies make money. One is the fees that they charge to institutions like restaurants, retailers, and other sellers of goods or services when an individual uses their card to make a purchase. The other way is the fees and interest they charge the individual cardholder.
If you wish to learn more about the interest factor that comes with a credit card, you are at the right place. In this article, we shall discuss everything about credit cards and how you would have to pay interest every time you make a payment with it.
Key Takeaways
- You will have to pay interest to the credit card companies unless you pay the balance on time every month.
- The interest on most of the credit cards is variable. Therefore, they are supposed to change from time to time.
- Some of the cards would be having a number of interest values, like one for the purchases and the other for the cash advances.
- Your credit score may affect the rate of interest that you are to pay as well as which of the cards you can qualify to use.
What Is The Interest On The Credit Card?
The basic concept of any credit card is borrowing money. The credit card company basically lends money to the cardholder to make purchases. The cardholder, in return, would have to pay the charge for borrowing money. The amount that credit card companies charge the cardholder for borrowing money is what the interest is all about.
It is expressed as the APR or the Annual Percentage Rate.
The annual percentage rate for most of the credit cards is variable. This means it would fluctuate with a specific benchmark like the prime rate. So, for instance, if the prime rate stands at 4%, and the credit card charges you the prime rate plus 12%, your total APR will be 16%. As far as June 2023, the average APR of all the credit cards that were tracked in the database touched 23.74%.
With most of the credit cards, they will only charge you an interest if you fail to pay the bull full every month. In such a case, the card company will charge an interest on the unpaid balance and will further add that charge to your balance. So, if an individual is failing to pay the full bill amount in the next month, they will end up paying interest on an already existing interest.
This is how credit card balances rapidly grow and get out of hand. This is something you need to avoid at all costs else you will end up with a huge burden of debt on your shoulders,
There are credit card companies that prefer complicating the matter further. To do this, they simply charge you with multiple interest rates. For instance, they may charge you with a fixed rate on your purchases while charging you with a higher rate of interest on cash advances.
How Does Interest On Credit Cards Work?
If you are carrying a balance on your credit card, the company will just multiply it every day with a daily rate of interest. They will then further add that to the amount you already owe.
The daily rate is the annual interest rate divided by the number of days in a year.
For instance, if you have an APR of 16%, your daily rate of interest would be 0.044%. If your outstanding balance on Day One was $500, the interest that you would incur for that day would be $0.22. Therefore, your balance for Day Two would add up to $500.22.
This process would continue till the end of the month. If we assume that your balance at the beginning of the month was $500 and you had no other fees or charges to pay, then your total balance at the end of the month would be $506.60.
What Can Be A Good Rate Of Interest For A Credit Card?
The interest for credit cards widely vary. This is one of the reasons why you must do your research well while purchasing a new credit card. There is an easy process to understand this. Just remember the better your credit score represents, the better will be the rate of interest that you will be eligible to receive. This is because the credit card company would then consider you to be less risky in comparison to someone who has a low credit score.
While you go shopping for your credit card, make sure you know your credit score and what range it falls into. This may help you figure out which cards and interest rates you may be eligible for before applying.
There are a number of websites where you may get your credit score for free. There are some credit card companies who also do the same.
Why Do You Need To Pay Your Balance In Full?
Being an investor, would you not be thrilled by the thought of getting a yearly return of at least 17% to 20% on a stock portfolio? To be very honest, if you were able to get returns worth that amount for a long time period, you would easily be able to run your own hedge fund.
Paying off the balance on your credit card is equivalent to a guaranteed return rate on your investment. If your credit card is charging you 20% interest each year and you are paying off the balance, it is a guarantee that you will save yourself 20%. This, in a way, is the same as making a return of 20%.
So, when you have some spare cash, it is quite better to spend it by paying off the loans for your credit card rather than using it to invest it further. If you are paying off the debt on time and while at the same time stop paying the interest, you will have a lot more money to invest in the near future.
The Bottom Line
I am hoping it is clear to you by now which payment option could have interest charged to you. Credit card interest is nothing but a debt trap because of the high rate of interest that the credit card companies charge over unpaid balances. If you are failing to pay the credit card balances, it will carry forward to the next month. If this process goes on for long, you will end up in a terrible debt.
Therefore, it is always feasible to pay the balance in full at the right time to prevent any unnecessary debt that would add more burden to your finances.
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