Credit Card Basics

Credit card interest

Interest, typically expressed as an annual percentage rate (APR), is the fee paid for the privilege of borrowing money. This fee is the price a person pays for the ability to spend money today that would otherwise take time to accumulate. Interest is only charged on the money you owe at the end of each month. Carrying a balance will come with extra fees. If you do a cash advance or a balance transfer, you may end up paying a higher rate of interest and other fees on those charges, compared to simple purchases.

The interest rate that you see on your statement or terms and conditions of your card is noted in annual terms. The cardholder will determine your purchases based on the daily rate, which is your interest rate divided by 365. The credit card company will then use that daily figure and multiply that by your balance at the end of each day.

For example, if your card comes with a rate of 16% annually, the daily rate would be = 0.16% / 365 = 0.044%, your 30 days rate would be = 30 x 0.044 % = 1.32%. If you had a balance of $500 at the beginning of the month and no other charges, you would end up with a bill of = $500 + ($500 x 30 x 0.044%) = $506.6 with interest by the end of that month.

Minimum payment

Your credit card terms require you to pay at least the minimum payment by the due date each month. This payment is the lowest amount you can pay on your credit card to avoid penalties. Minimum payments are typically calculated as a percentage of your outstanding balance plus any fees that have been added to your balance. That means the higher your credit card balance, the higher your minimum payment will be. The minimum payment must be paid by the cutoff time on the payment due date. Your credit card issuer will give you a few options for making your minimum payment by mail, online, or over the phone. You can't use another credit card or debit card to make your minimum payment.

If you miss your monthly minimum payment or you pay less than the minimum, your credit card issuer can charge you a late fee. After you miss two minimum payments in a row, your credit card issuer may raise your interest rate to the penalty rate. After your minimum payment is more than 30 days late, the credit card issuer will report the late payment to the credit bureaus. This late payment will go on your credit report and remain for seven years. Your credit score might also be impacted, especially in the first few months after the late payment is added.

It's best to pay your balance in full to avoid paying interest on your credit card balance and stay out of credit card debt. When you make the minimum payment, your credit card balance only goes down by a small amount. The majority of your minimum payment is applied to the interest on your account. Paying only the minimum on your credit card is the most expensive way to pay off your credit card balance. In fact, if you're making the minimum payment yet continuing to make purchases each month, your balance will grow instead of shrink. This is one of the fastest ways to get yourself into debt.

Balance transfer fees

Many credit cards allow cardholders to transfer a balance from another credit card account. Some credit cards even grant consumers low or no interest for a limited time on such balances. This can help you save on interest by consolidating high interest debt into a single, low or no interest account. Most cards charge a fee of 3% to 5% of all balances transferred. So, if you were to consolidate $10,000 of debt, the balance transfer fee would be between $300 and $500. That may seem high, but the interest savings you can gain with these offers can more than make up for the initial fee.