Credit Card Interest - Is It Worth It?
Credit cards can be a life-saver when unexpected expenses occur, and you need a short term solution. However, without careful spending habits, you can quickly find yourself in over your head when it comes to credit card debt.
According to the Federal Reserve, revolving consumer credit debt reached $1.057 trillion as of March 2019. With an average credit card balance of $6,354, Americans are paying thousands in credit card fees each year. In this post, we're going to discuss credit card interest and why you should avoid it — if you can.
What Is Credit Card Interest?
When you buy things with a credit card, your purchases are subject to the Annual Percentage Rate — colloquially known as the APR. This number varies, based on several different factors such as the type of card you have, and how good your credit score is. Although your APR is expressed annually, credit card companies typically apply it to your monthly statement.
Credit cards with a variable interest rate, are also subject to the Prime Rate. The Prime Rate is three percentage points above the federal funds rate.
It's important to note that credit card companies also tend to charge different interest rates and charges for cash advances and balance transfers. You may also be subject to a higher penalty interest rate if you do not make your payments on time.
How Is Credit Card Interest Calculated?
Credit card interest can be calculated by dividing your APR by 365 and multiplying your balance by the answer, to find your daily interest charge.
If your credit card APR is 18%, you will have a daily rate of .04931507%. A balance of $1500 at this interest rate will increase by approximately 73c daily. This amount is added each day to find your monthly total — which would equate to a balance of $1521.90 to at the end of the month.
Paying with a credit card can sometimes make sense — for example, if you're trying to build up your credit, or if you can pay it off your balance quickly. However, if you fail to pay off your outstanding balance in full each month, the interest will be compounded. This can make it increasingly difficult to get out of debt.
What Are The Consequences Of Credit Card Debt?
Besides the stress of having to make repayments, credit card debt can also negatively impact your credit score. In order to avoid your credit score being lowered, you should aim to keep your account balances below 30% of your available credit limit.
It is also vital to make the minimum payment of your outstanding balance on time each month. If you fail to pay in a timely manner, your credit score will fall drastically, as lenders will view you as a risky borrower — making it difficult to get credit in the future.
How To Save Money On Credit Card Interest
Only spending what you can afford, and paying your balance off in full each month is the best way to avoid credit card interest. Credit card companies typically offer a grace period in which they don't apply interest — as long as you have no outstanding balance.
It's crucial to check your credit card agreement to understand the terms and conditions of your lending fully.
If you'd like some general financial advice and useful tips on how you can work your way out of credit card debt, check out our podcast.
All information and materials in this article are for educational purposes only. Opinions expressed in this article are based on information considered reliable, but The Daily Money Show cannot guarantee the accuracy of the information nor should it be relied upon. The information discussed in this article should not be used as a recommendation to buy or sell securities nor should it be taken as investment advice. The Daily Money Show is not a Registered Investment Advisor or Broker Dealer. The Daily Money Show is not an accounting firm and does not give tax advice regarding any security or real estate transaction. You may want to consult with an accountant, attorney, real estate agent or financial advisor before proceeding with any transaction regarding securities or real estate.