Most people use credit cards. It is a good idea to pay them off monthly, but what if you don’t? You will end up paying interest and related fees. So how much does that cost you?
This article will guide you in figuring out your credit card rates.
Calculate Credit Card Rates
To determine the actual cost of using your credit card, you’ll have to figure out how much you are paying in interest and fees.
To do so:
- Figure out what you owe.
- If you are unsure, look for your last credit card statement, which will show the amount.
- Look for the annual interest rate (APR) you are charged on your balance. This should also be on your statement.
Be aware that you will be charged interest daily by credit card companies. This is called a compound rate. Each day you don’t pay off your balance, the amount you owe will grow.
To calculate how much interest you owe per day, you must divide your APR by 365 days. This is the periodic or daily interest rate. Some credit card companies will not charge interest for certain holidays. If that is the case, you can subtract those days from 365 to calculate the daily rate.
For example, if you have an APR of 6.5%, your daily interest rate would be 0.018%.
Because your credit card balance will change over time, you should figure out your average daily balance per month. An excellent way to get a rough estimate is to take your starting and ending balances, add them up, and then divide them by two.
Now multiply the daily interest rate by the average daily balance. Multiply this by the number of days in that billing period. This will give you the total owed that month.
If you are routinely paying enough to keep interest expenses low, you can breathe a sigh of relief. However, what if your calculations show that you spend too much per month on interest? It might be time to consider your options.
There are two ways to cut down on how much you are paying in interest. One option is to pay off more than you spent on the card until the debt is paid off, then pay the complete balance each month.
The other method is to find lower interest rates. For example, what if you get an offer in the mail that will give you six months interest-free if you transfer your current credit card debt. This could be a way for you to come out ahead.
If you use this method – don’t charge a lot on the new credit card. Instead, use the zero-interest rate to pay off your debt as much as possible.
To see how your interest payments compare to the average interest rate on credit cards, check out Lantern by SoFi. This site allows you to compare credit card interest rates, fees, and other helpful information. It’s an excellent tool for making financial decisions.