The interest on your credit card is the main source of revenue for credit card companies. Although reward credit card companies set your interest rates yearly, they calculate interest against it on a monthly basis. The interest rate is also termed as an APR (annual percent rate) which usually ranges between 12% and 30%. We’ll tell you what it actually means when your bank says your credit card has an 18% APR.
To start off, the interest rate against your credit card depends on the following elements.
- Type of credit card
- Type of lender
- Credit score
The simplest way to decrease the interest rate against your rewards credit card is to increase your credit score as much as possible. The example detailed below explains how reward credit card companies calculate interest on your statement.
How to Calculate Interest?
Credit card companies calculate interest against your credit card by multiplying your balance with the APR. For example, if you have $50,000 and your APR is 18%. An APR amounting to 18% means that the company would calculate interest on it at 1/12th of 18%. Therefore, you would be required to pay a total of 1.5% of your balance as interest on a monthly basis. From this example, we conclude that the yearly rate in this case is 18% and the monthly rate turns out to be 1.5%. This direct relationship implies that your interest rates increase as your APR increases. Click here for more examples.
Knowing how your credit card company calculate interest on your statement is important and very easy and now that you know how it’s done, you need to know just two more things.
- The reward credit card company calculates interest from the day you make the purchase.
- The CARD Act 2009 outlines the amount of time it should take you to pay off the interest against your statement (assuming your only pay minimum balance).
These points will help you make better decisions on paying off your balance within a realistic and equitable period of time. To calculate your interest rate online, click here.