Why You Might Get Charged Interest With No Balance
Its understandably confusing to get a credit card bill that includes interest charges after bringing your account balance to zero. In some cases, it might end up being a mistake on the credit card companys part. But its most often a simple case of misunderstanding the credit card billing process.
So lets try to set the record straight, starting with a practical example.
Say you didnt pay your last monthly bill in full and owe $500 when your next months credit card statement becomes available on June 1. While you may have until June 30 to submit a payment before its considered late, interest will be assessed based on the average daily balance in the interim. That means the amount you owe will increase with each passing day.
So even if you pay off the full $500 balance by the due date , youll still owe money for the interest charged daily since June 1. As a result, when your new bill becomes available on July 1, your balance will be equal to the interest you racked up the previous month. If you do not pay this amount, you will incur interest on interest and will continue to do so until you have paid two consecutive bills in full, regaining your grace period.
What can you take away from this example?
Example: Interest Rate Increase
Say you have a promotional interest rate of 4% for the first 6 months that you have a credit card, which will increase to a standard rate of 19% after the first 6 months. But because you miss your minimum monthly payments during the first 6 months, your interest rate increases to 24%. This would seem like a 20% increase over the promotional interest rate.
Check with your credit card issuer about how much your interest rate will increase if you miss your required monthly minimum payments. This information is usually provided in your credit agreement or information box included in the credit card application.
Federally regulated financial institutions such as banks must notify you before an interest rate increase takes effect.
Understanding The Different Aprs
Until now, the APR weve been talking about is the purchase APR the amount of interest you pay on purchases.
But depending on the type of card you have, there may be other interest charges and APRs to consider:
- Introductory APR – This is for a special introductory rate that may be offered to customers when they first apply for a credit card. These can range from 0% introductory rates for purchases, balance transfers or both. Its important to remember that once the intro period ends, so does the intro APR.
- Balance transfer APR – this is the annual interest rate charged when you move a balance from your existing card to this new one. Some cards offer an intro 0% balance transfer APR for a set period of time. But beware that rates will jump once that period is over. So we strongly recommend repaying the balance transfer before the introductory rate expires.
- Penalty APR – this may be applied to your credit card if you regularly spend beyond your credit limit or make a late payment.
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How Does Credit Card Interest Work
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You may know your credit card will charge interest if you don’t pay off the balance each month, but do you know how that credit card interest actually works? Credit card interest is calculated based on an account’s average daily balance during the statement period, and is compounded daily. However, interest charges are usually waived when cardholders pay their entire statement balance by the due date. Here’s what you need to know about how credit card interest works.
Ways To Avoid Or Reduce Credit Card Interest
Here are 5 ways to minimize or avoid interest charges on your credit card:
- Pay your bills in full each month: If possible, pay your bills in full to avoid paying interest at all. This also means you never have to worry about forgetting to make a payment and getting hit with late fees.
- If you cant pay in full, pay more than the minimum: If youre unable to pay your balance in full, dont be content with just making your minimum monthly paymenttry to pay your balance down as much as you can. The lower your balance is, the less youll have to pay in interest. 5
- Negotiate a lower APR: Theres no guarantee this will work, but you can call your credit card issuer and negotiate a lower interest rate if youre struggling to pay your bill in full each month. Securing a good credit card APR could make a big difference on your credit card statement each month.
- Use a credit card with a 0% introductory APR: Credit cards with a 0% intro APR allow you to save money on interest for up to 21 months, depending on the card. Keep in mind that this promotional 0% APR period is only temporary, so you should take note of when it ends.
Check out our top picks for the best 0% APR credit cards.
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How Does Interest Work
When you carry a balance from one billing cycle into the next, most credit cards charge interest using the average daily balance method. You can calculate your cards daily interest rate by dividing the APR on your card by the 365 days in a year. Each day you carry a balance, if your card charges interest based on the average daily balance method, youll be charged based on the balance from the day before. The higher your cards APR, the greater the interest youll accumulate each day.
For example, for a credit card with an APR of 17%, the rate per day would be .17/365, or 0.000466%. That daily rate interest is then multiplied by your balance that day. Since the average daily balance is compounded, each day the calculation is based on the day before.
So you have a balance on Day 1 of $10,000, on Day 2, your card would have a balance of $10,004.66, which is what you get when you multiply the balance of $10,000 by the daily rate of 0.000466. This means the balance of $10,004.66 on Day 2 would also be subject to the daily rate of 0.0466%, making your balance $10,009.32 on Day 3 and so on until the end of that months billing cycle.
However, if you pay your bill in full by the end of the month, you wont have to pay any interest at all.
How To Get A Business Credit Card
There are a few things to consider when trying to get a business credit card. The first is to make sure that the business is qualified. This means that the business must have been in operation for at least one year and have a good credit history. The second is to find a card that offers the best terms for the business. This means finding a card with a low interest rate and a good rewards program.
A business credit card may provide a variety of benefits to both your business and your institution, regardless of your companys size. A consumer card may provide you with fewer credit limits, but these cards provide you with more. If you have a separate card unrelated to your personal account, you can organize your tax records during the tax season. The use of a business credit card can be beneficial to a number of businesses. In general, a business accounts credit limit is higher. If your company finances are separate from your personal accounts, it is much easier to handle business finances. Businesses can use it to build their own credit histories in addition to building their own.
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Determine Your Average Daily Balance
Your average daily balance is based on your balance for each day of that months cycle. Your credit card statement wont list how much your balance is for each day, but you can calculate it based on your transactions that month. For example, on Day 1 of a 30-day billing cycle you had a balance of $0 and then didnt make a charge until Day 5 for $500. On Day 10 you made another charge of $100. Your daily balance for each day would be as follows:
- Days 1-4: $0 balance
- Days 5-9: $500 balance
- Days 10-30: $600 balance
To find the average daily balance, youd have to add up the balance for Days 1-30 and divide it by the number of days in the billing cycle, which is 30 in this case.
So your calculation would look like this:
- / Number of days in the billing cycle
Using the example above it would look like:
- ++) / 30 = $503.33 average daily balance that month
Lowering Apr On Existing Accounts
While changes in the economy and missed payments can lead to higher rates, there are ways to lower rates, too. You always want to work to have the lowest annual interest rates possible on any of your credit card accounts. This ensures that if or when you carry a balance, you at least minimize the cost of doing so.
But dont expect that a creditor will lower your credit card APR for you! You must be proactive and call them to ask for a rate reduction. Simply call the customer service line for your credit card and ask to speak to someone about your rate. Then you can negotiate to lower the APR so you can minimize interest charges.
Interest rate negotiation works best when:
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How We Calculate Your Interest
We charge interest starting from the date of the statement cut-off date and is calculated each day until such amount is paid off. If you make a transaction after a statement being issued, it will be reflected on the following statement. We work out interest on a daily basis and add it to the account on your monthly statement date.
Fees and charges will incur from the date that each transaction is charged to your account until such amount is paid off.
If you only pay the minimum payment, or less than that, by the due date, we will charge you fees, charges and taxes. Check our Fee Schedule here for fees and charges applied to each transaction.
If you dont have any cash advances and pay the full amount you owe us immediately by the due date, you wont be charged any interest.
How To Avoid Or Reduce Credit Card Interest Charges
The simplest way to avoid paying interest charges and remain debt-free is to pay off your outstanding balances in full each month before the end of the billing cycle. Alternatively, try to pay as much as you can on your debts each month to reduce the total amount you owe as quickly as possible. The longer you have outstanding credit card debt, the more you pay as interest.
The Grace Period
All new purchases come with a grace period of at least 21 days as required by the during which you wont be billed interest on the charge. You may make use of this grace period to ensure that your payments get to your card provider on time and avoid or reduce your interest charges.
However, keep in mind that you may not receive the grace period if you didnt pay off your balance in full after your last billing cycle, have an outstanding amount on a balance transfer or take a cash advance.
Other Ways to Reduce Interest Rate Charges
If you plan to maintain revolving balances, one way to pay less interest is to look for cards with low APRs. Typically, you need excellent credit to qualify for such cards.
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How Much Is Credit Card Interest & How Is Credit Card Interest Calculated
To find out how much interest youre paying on your balance each day, you can convert your APR to a daily percentage rate. To do so, divide your APR by 365, the number of days in a year. At the end of each day, the card issuer will multiply your current balance by the daily rate to come up with the daily interest charge. That charge is then added to your balance the next day, a process called compounding.
For example:
If your credit card has an APR of 15%, it will have a daily rate of 0.041096%. Lets say a cardholder has a balance of $1,000 at the 15% APR standard interest rate. The next day, interest is added and the balance becomes $1,000.41, plus any additional purchases and minus any new credits or payments. This process occurs each day until the end of the cardholders monthly statement cycle. So at the end of the month, the beginning $1,000 balance becomes $1,013 when interest charges are applied at 15% APR.
What Is A Credit Card
A credit card is a way to borrow money or get âcreditâ from a bank. The official term is ârevolving line of creditâ. In normal speak itâs a card with a set amount of funds you can borrow at any time. This limit is set when you apply for a card.
Where accepted, you can use a credit card to buy things without cash and pay for purchases online or over the phone.
Like all debts, you need to repay the credit card. Credit cards have interest rates, which apply to amounts that you havenât paid back, thereâs a minimum monthly repayment, and most cards have an annual fee.
You should apply for a credit card only if you can afford the repayments.
At NAB, we offer a no interest credit card, the NAB StraightUp Card, which works a little differently.
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How Do 0% Apr Credit Card Offers Work
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A credit card with a 0% APR offer works like any other credit card, with one key difference: It doesn’t charge any interest for the duration of the 0% period. That makes it an effective tool for financing a large purchase or paying down high-interest debt transferred to the card from somewhere else.
» MORE:How to choose a 0% APR credit card
What Is Periodic Interest
The periodic rate is the interest rate applied over one billing cycle. Its easy to calculate if you know APR. Simply divided APR by twelve. Then you can multiply that periodic interest rate by your balance. This tells you how much interest youll pay in a given pay period.
For example, lets say you have a credit card APR of 20%. Your balance is $500. If you want to calculate the interest charges, youd take:
0.2 ÷ 12 x 500 = $8.33
Of course, both APR and interest charges for a billing cycle are listed on your credit card statement. But knowing how to apply periodic interest can give you can easy way to check. It also shows you how much of your minimum payment gets used up covering accrued interest charges each month!
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Purchase Rates And Cash Advances
Generally, the APR quoted for each card only applies to purchases made, rather than cash withdrawn.
Using your credit card to make a cash advance normally comes with much heftier rates and charges and so you should really only do so when it is absolutely necessary.
Where possible, you should stick to making purchases with your credit card and, if you need to withdraw cash, use your debit card instead.
How Is Apr Determined
So, now we know how interest is calculated, but where does your APR come from? It may seem like credit card companies just spin a wheel to decide your annual percentage rate. But there actually is some logic behind the number.
If credit card companies are going to lend you money, they want to make sure youll pay it back. And if theres a higher chance you wont pay off your credit card bill each month, then your interest rate will probably be higher as well. So, your interest rate usually depends on your credit score and your incomebecause those are things that show youre more likely to pay off your balance regularly.
In the credit card biz, they call this someones creditworthiness. But if the only way to prove youre worthy enough to borrow money is to go into debt first, then it isnt something you should be aiming for. Instead, think of APR as your credit riskiness.
And like we said before, there are also different types of APRs for different credit cards. Heres a quick rundown of each APR type:
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