A credit card interest rate has a certain way of being calculated. If you have been confused about this subject, then take a look at this article to get your questions cleared up.
A credit card interest rate is also known as the annual percentage rate on a card. You are charged interest for the credit that is provided by the bank, and you can read more about interest and how it is applied in the terms and conditions of your contract.
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Credit card interest rate
There is a difference in the credit card interest rate for each card, and on these cards different transactions can be charge different rates. One bank may have a special rate for doing a transfer balance and a different rate for purchases. The interest charge is based on the transactions performed in the previous month if the balance is not paid off in full by the due date.
Four categories of interest
1. Cash interest
This would apply to any cash transactions such as bills paid at a branch or a post office, telephone or Internet banking, transfers to other accounts or withdrawals from ATM machines.
2. Purchase interest
This is interest that is charged on any of your purchases such as insurance premiums, direct debit, paying bills or your everyday purchases such as buying food or fuel.
3. Interest on interest
When you have an outstanding balance and interest is added to it you will have to pay interest on top of the already added interest charge.
4. Special interest
This is interest on other amounts like a transfer balance.
When it is charged
Interest will be added to your account on the last day of the statement. You can find out what day the last day is by looking at the statement that you receive monthly. You can find the first day there as well.
How it is calculated
The interest is calculated based on the credit card interest rate you have agreed to with your bank for that particular card. It is charged on each statement period’s last day. For each transaction type, at the end of every day, the ending balance is calculated for each type of transaction. Every ending balance is then added up and divided by the amount of days there are in the statement period. Each annual percentage rate is divided by 365, which is the number of days in a year.
Interest free period
Most credit cards offer this feature which allows you to have interest free days as long as the full payment is paid on time. If it is not paid in full, then interest charges begin to apply.
This is how a credit card interest rate is calculated. Knowing this information can help you determine your spending habits better, and allow you to plan out your future credit card habits.
