Interest rates on credit cards are among the highest rates permitted in the consumer loan market. While most interest rates are between eight and fifteen percent, rates on credit card are allowed to go as high as thirty percent. With rates this high, even small debts can take a person years to pay off.
Unfortunately, not many people pay a lot of attention to their APR when they apply for a credit card. In today’s economy and tight credit market, most people are just happy to get a credit card.
For about half of all Americans, the APR on their credit card really doesn’t matter. That is because nearly half of all American cardholders pay their balances in full every month. People who do not carry a balance on their cards do not have to worry about the APR, because they do not pay interest charges on their purchases.
If you’re reading this website, however, you most likely are part of the other half of American cardholders who do carry a balance on their credit card. Many people, especially those who are just starting out their financial lives use credit cards as their emergency fund and as a way to finance major purchases.
Ideally, a person will stop using credit cards for these purchases and establish an emergency fund. Until then, however, it’s important to learn exactly how this type of short term loan works. In general, a credit card allows its holder to make charges up to a pre-determined limit. Going over this limit usually invokes a fee, but a lot of cards will allow their users to go over.
Once charges are made on the card, a cardholder will receive a bill. This bill will itemize the charges and any fees that were charged during the billing cycle. The billing cycle for most cards is about a month. At this point, no interest has been charged on the card. After the cardholder makes his or her payment, the total amount of the payment is subtracted from the balance on the card.
If the balance has been paid in full, no interest is owed on the card. In the event that the payment does not cover the whole amount of the bill, interest is charged. In general, the credit card company determines this amount by dividing the APR by the number of billing cycles in a year. This percentage is then applied to the remaining balance on the card. This amount is added to the total balance on the card.
During the next billing cycle, a cardholder can continue to make charges on the card. It should be noted, however, that interest is now charged on all of these purchases. At the end of the second billing cycle, the cardholder will receive a bill that includes all of his or her purchases and the interest charges.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.