How is Credit Card Interest Calculated?

By: Mike Johnson

Credit cards can sometimes be confusing things and hard to really understand all their language. A lot of people sign up for credit cards without ever really looking into what they are signing up for. There are so many different agreements that it sometimes can be easy to get lost and quickly. But before you get too lost, stop and learn a bit about it.

One of the things that credit card users have concerns about it is the interest that they are paying on their cards. It may get a bit confusing with all the different terms and agreements and acronyms. So how do you really determine how your credit card interest is calculated?

Check Out Your Statements

If you have never even picked up your statement to see what it is your paying for, today is the day to start. To determine your interest rates you will want to locate this part on your statement. Each card and each bank offers different rates but typically it is between 7 and 36%. But this is determined by each card or bank.

What is APR and Compounding?

Even though APR stands for annual percentage rate, it doesn't really mean that credit card company will only check your balance once a year and charge you interest. Most credit cards are compounded on a monthly basis meaning that they take your APR or annual rate and divide it amongst the twelve months. This may seem somewhat confusing, but your interest will be determined every month.

Now if you want to know exactly how much interest you are going to have to pay this month than you can easily figure it out if you know your APR and how it is compounded and also what your current balance is. If you are better educated about all of these things then you shouldn't be surprised when you get your statement.

Never forget the power of compounding interest. It can either work for you or against you, meaning it will either free you forever financially, or it will bury you forever financially.

I once spoke to a millionaire who shared some words of wisdom with me. He said: people who understand interest earn it. Those who don't understand it, pay it.

That's pretty powerful advice from a millionaire, and everyone should take it to heart. The question you should really be asking yourself is not how credit card interest is calculated, but how mutual fund, or savings account interest is calculated.

Also, if you read The Richest Man in Babylon, it talks about how you should make sure to be saving money at the same time you're paying off debt. That way when you've finished eliminating all your debt, you're at less risk of falling back into debt again because you have a nice cash reserve in place.

Once you have achieved debt freedom and a healthy cash reserve, you're really on the path to financial independence. As long as you stay focused and enthusiastic about this goal, it can be yours.

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