How Interest On Credit Cards Is Calculated And Two Ways To Minimize ThisMay 5, 2010 - 1:56 am
These days, we are living in a cashless society. A majority of us barely even carry enough money around to purchase a cup of coffee at the local café. Most purchases are done using a debit card or credit card directly at the merchant location. Some banks charge a small fee per debit card transaction, which is usually overlooked by most consumers. But, when it comes to credit cards, you may be paying a lot more than you intend to.
The purpose of a credit card is to allow the user to ‘borrow’ money to purchase a wide variety of products and services. The credit card company then expects you to pay this back on a monthly basis at a set interest rate amount. This is how credit card companies generate their revenue; through the accumulated interest. The amount of interest charged varies from consumer to consumer and is based on two factors; the credit history of the user and the methods that the bank uses to determine risk.
Most credit card companies determine how much credit card fees each person pays by using the average daily balance method. To do this, they add up each day’s balances and divide them by the number of days in the billing cycle. Then they calculate the monthly interest. This is done by dividing the annual interest rate by 12 months. If you multiply the average daily balance by the monthly interest, you come up with the credit card interest amount due. For example, if the average daily balance is $500 and the annual interest rate is 12.99%, then the amount that you owe, including the credit card interest, is $541.25. You are paying an additional $41.25 more to the credit card company.
There are a few ways that you can minimize the amount of interest you pay on your credit card purchases. You can pay off the total amount that you owe before the due date. The sooner you pay, the lower your average daily percentage and the lower your interest charges will be.
Another way to minimize your credit card fees is to transfer the balance from a high interest credit card to a low interest credit card. Be careful with this option; you must fully intend to clear up this debt, otherwise, interest charges are still accumulating and this move will not benefit you at all.
You should always periodically review your credit card statement to ensure that all charges are correct and that you are being charged the agreed upon credit card interest rate. As well, it would benefit you to shop around with a few companies in order to compare who can offer you the best and lowest interest rate.