Common Credit Card Costs, Interest Rates (APR), and Fees

Credit cards fanned over calculator over dollar bills.Spending money that doesn’t feel like yours may be fun, but it certainly isn’t free. The costs and fees associated with credit cards are important to fully understand prior to using your card for the very first time. Otherwise, you could be surprised by some of the costs and fees you never anticipated.

Interest Rate and APR Basics

At the most basic level, interest is the fee paid for the privilege to borrow money. The financial firms lend out money and they charge for allowing you to use it. The rate charged can vary for each consumer based on how confident the credit card issuer is that you will pay them back. This evaluation relies heavily on your credit score and report.

In the United States, the average interest rate on a credit card typically varies between 15 and 20 percent. Even for those with spotless credit, a double-digit interest rate is fairly standard on a credit card. It is important to put this into perspective.

When thinking of the 15 to 20% interest rate on a credit card, this fee is expressed as Annual Percentage Rate (APR). So, at 20%, you would divide this by 12 to get the rate that will be applied to your balance monthly (1.67% in this case). This rate can be charged as a fixed APR or as a variable APR.

Fixed Interest Rates

A fixed interest rate is what it sounds like – a rate that is fixed during the charge period. It does not fluctuate over time, and it provides consumers with a predictable way to calculate their interest charges. However, most credit cards come with variable APRs.

Variable Interest Rates

Variable interest rates on the other hand are tied to some type of published rate, often the US Treasury Bill Rate or Prime Rate. The rate will be expressed “prime rate + your rate.” This will be updated at set increments, even daily. Although variable-rate cards often offer lower introductory rates, they can cause trouble for consumers down the road if the rate resets to a much higher percentage.

Interest Charge Calculation Methods

The calculation using the APR, fixed or variable, can change from company to company and card to card. Here are a few calculation methods to be aware of.

Average Daily Balance

The credit card company averages your daily balance throughout the month. Specifically, they look at your balance each day, add all the daily balances together for that billing cycle, then divide that by the number of days in the month. That amount, multiplied by approximately 1/12th your APR, would equal the finance charges for the month.

Daily Balance

Credit card companies calculate the finance charge based on your outstanding balance each day. This daily amount is multiplied by approximately 1/365th of the APR to determine the daily finance charge.

Two-Cycle Balance

This is one to look out for because it can be the most expensive. Here, the credit card company charges interest on debt already paid. They will take the average daily balance over the past two billing cycles and charge interest on it. The bad thing here is that extra payments to reduce your balance won’t affect the previous balance, so you’ll have to pay a higher rate, even after reducing your balance.

Previous Balance

The credit card company issues a statement showing the balance at the beginning and the end of the month, and charges interest on the beginning.

Other Typical Credit Card Fees

Annual Fee – some credit card companies will charge consumers or businesses an annual fee to use a specific credit card with certain benefits and features. Oftentimes an upgrade to one of their no-annual-fee cards.

Finance Charge – usually charged monthly based on the APR, balance, and grace period.

Cash Advance Fee – charged each time you take a cash advance and is usually 3% to 5% of the amount withdrawn.

Balance Transfer Fee – a fee that is charged each time you transfer money owed from one credit card to another. You only pay the fee to the card issuer you’re transferring the balance to.

Minimum Payment – the lowest amount of money you’re required to pay by a certain date to avoid defaulting on the agreement and receiving any late fee penalties for doing so. It’s usually a minimum percentage or dollar amount and is based on your outstanding balance.

Late Payment Fee – the fee applied whenever you don’t pay your minimum payment due by the due date.

Over Limit Fee – some companies will allow you to charge more than your available credit limit; however, they will likely charge you a hefty over-limit fee.

Next up, tips for choosing the right credit card for you.

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Posted on April 23, 2021 by in Credit Cards

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