September 6, 2021

How Does Credit Card Interest Work

Everything you need to know about how credit card interest works, how your interest rate is determined, and how to pay less in interest over time.

11 min read

Qoins Staff


What is credit card interest?

Interest is defined as the cost of borrowing money from the lender. In the case of credit cards, the terms interest and APR are used synonymously and interchangeably. APR stands for Annual Percentage Rate.

When we apply APR to the price of purchase (using a credit card) it implies the following:

  • The credit card provider pays the merchant the amount that is listed as MRP on the item that you have purchased.
  • You will be repaying that same amount to the credit card provider over a course of time in such manner and method as described by the provider in his company clause.
  • You will also be paying an additional amount which is obtained by multiplying the APR with the MRP of the purchased item. This amount is called interest. This is the card provider's fee for helping you with the purchase of your desired item.
  • If you are not regular with your repayment, the card provider shifts the outstanding amount and interest to the next billing cycle when interest is charged over it.


When is credit card interest charged?

When you are not able to pay your full balance in one billing cycle, the amount due is moved over to the next billing cycle and interest is charged over it. Such a balance is known as a revolving balance. In order to reduce or get rid of your revolving balance, you need to complete your payments every billing cycle. Otherwise, the interest gets accrued over the revolving balance and keeps compounding if you do not pay it back.


Types of credit card interest

Different credit card companies charge different APRs. This rate is charged for a limited time as a promotional concession to increase the popularity of the credit card company among target customers. You might also be charged with zero interest rate during the initial few days or months of the credit card issuance. However, if you do not submit your monthly payment on time, the company might decide to take back its null interest policy and you will be charged with interest too.

Typically, interest is charged over transactions that are in the form of cash advances and balance transfers. Moreover, there might be a chance that the APR for the previously mentioned categories are higher than the APR's for normal purchases. You might also attract a higher APR due to late payment or non-payment of monthly credit.

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How your credit card interest rate is determined

If you have been a punctual payer, you will have a high credit score. A higher credit score is indicative of a reliable customer. Your credit card provider will reward your regularity by offering you a lower than normal APR. Don't have a credit score? Here is what you need to do.

APR can be of two types. First is the fixed APR. As the name suggests, this rate remains fixed unless your payments turn late in which case a higher APR is charged. The second type is the variable APRs. They are dependent on prime rates and fluctuate according to them. You should check if your credit card provider has a fixed or variable APR.

How to pay less in Credit Card Interest?

  • Ensure that you have a good credit score. Your credit score depends on the amount and date of your monthly payments. A consistent and responsible credit record will help you attract a lower APR.
  • Make sure that you pay the balance in full every billing cycle. If you are not able to pay the full balance, the amount due will be shifted to the next month and interest will be charged over it. As you continue to avoid paying full amounts every billing cycle, your credit card provider will carry forward the money to the next month. This is an interest on interest kind of scenario. You will end up paying much more than what you could have paid if you had directed full payments to the card provider every month. The higher the balance you carry from month to month, the more interest you pay for it.
  • If you are unable to pay the full amount, try to deposit the minimum credit card payment that month.
  • If you are not paying your full balance every month, remember to not wait until the end of the month to deposit your payment. If you have had a history of credit deposition that is lower than the full amount, deposit the monthly amount as soon as possible every month.
  • Try opting for a credit card that has a zero percent introductory rate. Look for card providers which offer a null rate for the longest time possible. That way you can avoid paying more interest. If you are able to clear your amount before the null interest rate period ends, you will be able to save a lot of money.
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