credit card interest Archives - Everday Resources

3 Ways to Reduce Credit Card Interest

1. Pay off your balance in full each month.

By paying your entire balance each month, you avoid interest entirely. This is easier said than done. If your goal is to pay zero interest, you will need to make a plan that includes budgeting all credit card purchases. Even if many find it difficult, this is achievable.

2. Ask your Credit Card Company for a rate reduction.

Is this even a thing that credit card companies are willing to do? Of course, it is.

Credit card companies like to let consumers think that some higher power decides interest rates. They want you to believe there is nothing anyone can do to change your number. Not questioning your interest rate always works out in their favor because it means your likely to pay more money directly to them.

Your credit card company’s primary focus is to keep you as a customer and paying interest as long as possible. If they think you might leave because of a higher interest rate, they can be surprisingly willing to discuss reducing it.

How to ask:

First, consider what your goal is. Just trying to save money? Have a unique situation that’s making you do this? Different goals might require you to take different approaches.

Next, gather some potential offers or options. Can you get approved for a 0% balance transfer? Is there any other way that taking your business to someone else might help achieve your goal?

Finally, call customer service. Let them know about your options. Tell them why you are considering making changes. Say you would rather not go, but that they need to give you a reason to stay.

3. Transfer your balance to another card.

A surprising number of credit cards offer 0% APR as an introductory offer for new customers. Transferring all (or some) of your balance to one of these accounts could give you just the time you need to pay down that balance with no interest adding to it. Just be fully aware that you will end up right back where you started if you fail to pay down the balance.

Of course, you can be stuck with your current interest payments. Occasionally the circumstances just don’t make that rate reduction possible. Those occasions are much rarer than most people realize, and even when they do occur, it is only temporary. By simply being aware of the options you have as a consumer, you can control how much it costs you to use credit cards.

It can be quite shocking to suddenly realize how much you are being charged in interest suddenly. It can be even more surprising if you look at it over 12 months. With the average American household paying over $1,000/year in interest alone, it is vitally important that every credit card consumer knows precisely how much they are paying in interest.

What Is Interest?

Credit card interest is simply the amount of money a bank charges for access to a credit line. It is calculated differently for different items. Rates can vary considerably depending on what kind of credit you are using.

Out of all of the different credit types used in the economy, credit cards typically require you to pay the highest amount of interest. They are also usually offered at a variable rate (APR), which means they fluctuate over time with the markets. Rates can be wildly different from person to person. The interest rate you pay is typically based on your creditworthiness. So the higher your credit score is, the lower your APR.

How Do I Find Out How Much I’m Paying

Many consumers only pay attention to the APR on their accounts when they sign up for a new one. Then they get a sticker shock months or years later. Your credit card statement clearly shows how much you are charged month to month but rarely gives you any indication of how that figure is calculated.

Thankfully the process to calculate your credit card interest is very straightforward. All you need is your statement and a calculator.

How to Calculate Your Credit Card Interest.

1. Figure out what your APR means to you daily.

This is called the Daily Rate. Interest is compounded daily rather than based on your balance at the end of the month. No, your credit card company isn’t adding charges to your account every single day. Interest is still added in one lump sum at the end of the month but its compounded interest.

2. Find your average daily balance

Make a note of each day of your billing cycle and the balance on that day. Remember, you pay the same compounded interest on the old balance as you do on any new charges. Then add the balances from each daily total, subtract any payments made, and then divide by the total number of days in your cycle

For example, if your cycle has 22 days: day1+day2+day3+…divided by 22days= average daily balance. Be sure to include the amount carried over from your prior billing cycle.

3. Calculate your Interest

Calculate your interest by multiplying the average daily balance by the daily rate. Then you multiply by the number of days in your billing cycle. That final total is your average amount of interest.

Learning how to calculate the interest on your accounts can help you catch potential mistakes. It can also make you aware of exactly how much your credit accounts are costing you. Staying aware of all of your accounts is a vital part of managing your money effectively.