How Does Credit Card Interest Work? Find out – and Save More

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How does credit card interest work? Most credit card holders understand the basics; they charge a purchase to the credit card, and the credit card company charges interest for the amount borrowed.

But calculating credit card interest actually has its own set of rules and practices that affects how much you pay each month. If you want to understand your credit card debt — and pay your balances down — you’ll need to know how credit card interest works and how much it’s costing you.

How are credit card rates set?

To know how credit card interest works, you’ll need to know your annual percentage rate (APR). This is the rate at which your credit card issuer will charge interest over a year.

The rate you’re offered will be determined by a few things: your creditworthiness, the credit card issuer’s rates on that particular product, and current interest rates.

Your credit score and reports

First, there’s your creditworthiness. This is usually reflected by your credit scores and reports, and reflects how much risk the lender is assuming by giving you credit.

How does this affect your credit rate? Usually, the issuer will list a range of APRs that it offers customers. For instance, it might be 15.99- 21.99% APR. This means that this credit card issuer offers the lower rate of 15.99% APR for applicants with higher scores. Interest rates on the higher range will be applied for those with lower scores.

If your credit score is bad enough, you’ll be rejected for a card altogether.

The type of credit card or issuer

Next is the type of issuer you have. Certain issuers, like credit unions, are more likely to offer low-interest credit cards. Others, like retailers offering store-branded credit cards, will usually charge higher interest rates.

The type of credit card you choose also affects the rate. Credit cards that offer rewards, from airline miles to cash back, will usually charge higher rates. That’s to help offset the costs of their rewards programs.

Today’s credit card rates

Credit card interest rates are variable, which means they can change month-to-month. A variable credit card rate is tied to interest rates in the economy as a whole. If lenders are paying more to borrow money, they will pass those charges on to you. So your credit card interest rate will go up when other key interest rates do.

How does credit card interest work?

When it comes down to it, your credit card interest is a pretty transparent formula. If you understand how your credit card calculates and applies interest charges, you’ll have a more accurate idea of the costs you’re facing.

How to calculate monthly credit card interest charges

Credit card interest is calculated using an “average daily balance.” Your credit card balance changes throughout the month, either because you made an extra payment or added a new charge. The credit card company will look at the average amount you owed each month by adding up the balance recorded each day, and dividing by the number of days in the billing cycle.

For instance, maybe you have a balance of $250 for the first five days. Then you return an item and get a refund from a merchant that lowers your balance to $200. Ten days later, you charge another $200 to the account, bringing your current total to $400. Your credit card company won’t charge interest as if you have a $400 balance the whole month.

Instead, it will average your balance to charge you interest in line with how you managed your credit card balance. In the example above, for instance, the formula might look like this: ($250 x 5 days) + ($200 x 10 days) + ($400 x 15 days) = $9,250 / 30 days in the billing cycle = $308.33 average daily balance.

Calculating monthly credit card interest with your APR

Next, to calculate credit card interest you’ll need to know your monthly credit card interest rate. To find your monthly interest rate, you simply divide your APR by 12, the number of months in a year.

So if your APR is 20%, your monthly interest rate would be 1.67%. Apply that to that average daily balance above of $308.33, and you’d end up with an interest charge of $5.14 for the month’s balance.

Calculating daily interest on credit cards

While the above method can be used to find monthly credit card interest, many issuers will calculate and charge interest daily.

In this case, the APR is divided by the number of days in a year, 365. For a 20% APR, that would be a daily interest rate of about 0.055%. Then this daily credit card rate is applied to any outstanding balance at the end of each day.

So for a balance of $1,000, the daily interest charge at this APR would be $.55. The interest charge is added to the balance, and the next day the process will repeat. So the next day, interest would be charged on the new balance of $1,000.55.

How to pay less interest on credit cards

The great news is that as you figure out how credit card interest works, you’ll be better equipped to avoid it. Here are some tips to avoid on credit cards that only require you to know a little more about how it works.

Don’t carry a balance and avoid credit card interest

One of the best ways to avoid interest on credit cards is to choose not to carry a balance month-to-month. Credit card issuers give a borrower a grace period, at least 21 days, to repay any charges to their account, before they apply interest charges.

If you know your credit card billing dates, particularly when your grace period ends, you can time payments to take advantage of this. Save money by repaying all (or even some!) of the balance by that date, and avoid interest charges.

Make extra payments between monthly statements

Maybe you can afford to repay your balance in full. But if you have some extra funds that you want to apply to a credit card balance, don’t wait until you send in your next full payment.

Paying extra and paying it early in the cycle will help lower your balance. It also means that you’ll have a lower daily average balance on which you’ll accrue interest. Or, if your issuer calculated credit card interest daily, you’ll have more days with a lower balance. It all means you’ll get charged less interest and be that much closer to paying off the balance.

Ask for a lower interest rate.

Don’t assume that your current APR is the one you’re stuck with. You can call your credit card issuer and request a lower interest rate.

If you’ve made responsible, on-time payments on a credit card for a while, cite that as a reason you deserve a lower rate. Or, maybe your credit score has improved since you applied. More often than not, the credit card issuer will help you out by bumping your score down.

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

RATES (APR)loan amount
5.99% – 20.01%1 $5,000 to $100,000
6.14% – 35.99% $1,000 to $50,000
6.98% – 35.89%* $1,000 to $50,000
99.00% – 199.00%2 $500 to $4,000
5.99% – 24.99%3 $5,000 to $35,000
5.99% – 29.99%4 $7,500 to $40,000
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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.99% APR to 20.01% APR (with AutoPay). Variable rates from 6.49% APR to 14.70% APR (with AutoPay). SoFi rate ranges are current as of November 15, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.49% APR assumes current 1-month LIBOR rate of 1.81% plus 4.93% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
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  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
2 Includes AutoPay discount. Important Disclosures for Opploans.

Opploans Disclosures

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Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.

  1. To qualify, a borrower must (i) be a U.S. citizen or permanent resident; (ii) reside in a state where OppLoans operates; (iii) have direct deposit; (iv) meet income requirements; (v) be 18 years of age (19 in Alabama); and, (vi) meet verification standards.
  2. NV Residents: The use of high-interest loans services should be used for short-term financial needs only and not as a long-term financial solution. Customers with credit difficulties should seek credit counseling before entering into any loan transaction.

  3. OppLoans performs no credit checks through the three major credit bureaus Experian, Equifax, or TransUnion. Applicants’ credit scores are provided by Clarity Services, Inc., a credit reporting agency.

  4. Based on customer service ratings on Google and Facebook. Testimonials reflect the individual’s opinion and may not be illustrative of all individual experiences with OppLoans. Check loan reviews.

  5.  

    Rates and terms vary by state.

3 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.
4 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.
* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Personal loans made through Upgrade feature APRs of 6.98%-35.89%. All personal loans have a 1.5% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Personal loans issued by WebBank, Member FDIC.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

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