When you carry a balance on your credit card, most credit card companies charge you interest from your billing date until they receive your payment.
Different credit card companies have different rules for charging interest. In general, once a credit card company begins charging interest, it will continue to charge interest until it receives your payment.
Your cardholder agreement should tell you the terms of your credit card. You should find a copy of the agreement on the credit card company’s website, or you can look it up by the name of the company. You can also request a copy of the agreement and their terms and conditions from your credit card company to get the complete information regarding charging interest on your spent amout that you have not paid.
So having a credit card is a great way for anyone to manage their finances during a cash crunch. It allows you to have money available when needed, make a purchase, and pay the amount later. The best thing about credit cards is that they are widely accepted and offer great financial freedom if used wisely. But before using it, it is important for you to know what a credit card is and how to use a credit card. Let’s see what a credit card is.
What is a Credit Card?
A Credit Card is a type of credit facility, which is provided by banks and allows customers to borrow money within a pre-approved credit limit. It enables customers to make purchases and transact on goods and services. Credit card limits are set by the credit card issuer institutions/ banks based on factors such as income and credit score of the borrower, which also decide the credit limit.
More about Credit Card…….
If you look at a credit card, you will see that the credit card information includes the credit card number, cardholder name, expiry date, signature, CVC code, etc. The best thing about a credit card is that it is not linked to any bank account. So whenever you swipe your credit card the amount spent is not deducted from your bank account but from your credit card limit. You can use it to pay for food, clothing, medical expenses, travel expenses, and other lifestyle products and emergency services.
How Credit Card Works ?
If you have or are thinking about getting a credit card, it is important for you to know what a credit card is and how it works. Credit cards can be used to buy goods and pay bills online or in stores. When you use a credit card for one of these, your card details are sent to the merchant’s bank. The bank then receives authorization from the credit card network to proceed with the transaction. Your card issuer will then have to verify your information and approve or decline the transaction.
If the transaction is approved, the merchant is paid and the amount of available credit on your card is reduced by the amount of the transaction. At the end of your credit card billing cycle, your card issuer will send you a statement showing all transactions for that month, your past balance and new balance, your minimum balance payment, and your due date.
The grace period is the period between the purchase date on your credit card and the due date listed on your statement. During this period, there is no interest charge if you pay your bill in full by the due date.
But if you keep arrears month after month, your card issuer may charge you interest. Your credit card’s annual percentage rate (APR) represents the cost of carrying a balance on an annual basis. Your APR takes into account your interest rate and other costs, such as your card’s annual fee, if you have one.
What is credit card limit ?
A credit limit applies to the maximum credit amount allotted to a customer by a financial institution. A lending institution places a credit limit on a credit card or a line of credit. Lenders usually set the loan limit based on the information provided in the borrower’s application.
A credit limit is a factor determined based on a consumer’s credit score and may affect their ability to obtain credit in the future. The credit limit of any credit card is determined by banks, alternative lenders and credit card companies based on various information related to the borrower. They check the borrower’s credit rating, personal income, loan repayment history and other factors before setting a credit limit.
Both unsecured credit and secured credit limits can be set. Generally, unsecured credit limits include credit cards and unsecured lines of credit. If the line of credit is secured – backed by collateral – the lender will consider the value of the collateral. Suppose a person takes a home equity line of credit, the loan or credit limit depends on the home equity of the borrower.
How many types of credit cards?
As a potential credit card owner, it would be appropriate for you to know about the different types of credit cards available in the market. Apart from this, it is also important for you to know what a credit card does and what type of credit card you will get the most out of. Not only will this help you make more informed decisions, but choosing and using the right credit card can make transactions more profitable for various expenses. Below is an overview of some of the most common credit card available in banks and financial institutions.
- Shopping credit card
- Travel credit card
- Fuel credit card
- Entertainment credit card
- Premium credit card
- Secure credit card
- Rewards credit card
- Student credit card
Difference between Credit Card and Debit Card-
The main difference is that with a credit card, the bank lends you money which you can use and pay back with interest on a monthly basis. Whereas, with a debit card, you are spending money you already have.
Know about Credit Card Interest
Credit card companies make money in two ways. One is the fee they charge retailers, restaurants, and other sellers of goods and services when you use their card to make a purchase. The second is the interest plus fees they charge you for using the credit card limit. Here’s how credit card interest works and how you can pay less.
What Is Credit Card Interest?
Interest is the credit card companies charge you for the privilege of borrowing money from them. It’s commonly known as the annual percentage rate (APR).
Most credit cards have variable APRs that fluctuate with a certain benchmark, such as the prime rate. So if the prime rate is 4%, and your credit card charges the prime rate plus 12%, your APR is 16%.
On most credit cards, you’re only charged interest if you don’t pay your bill in full each month. In that case, the credit card company charges interest on your outstanding balance and adds that charge to your balance. This means that if you don’t pay your balance in full the coming next month then you’ll owe interest on your interest. Credit card balances can thus grow quickly and sometimes out of control.
To complicate matters further, some credit cards charge multiple interest rates. For example, they may charge one rate on purchases, but another (usually higher) rate on cash advances.
How does credit card interest work?
If you carry a balance on your credit card, the card company multiplies it by the daily interest rate each day and adds it to your balance. The daily rate is your annual percentage rate (APR) divided by 365.
For example-
If your card’s APR is 16%, the daily rate would be 0.044%. If you owed $500 on the first day, you’d have to pay $0.22 in interest that day, $500.22 in total on the second day.
This process continues until the end of the month. If you had a $500 balance at the beginning of the month and no other fees were added, you’d have a balance of $506.60, including interest.
What is a good interest rate for a credit card?
Credit card interest rates vary widely, which is one reason to shop around if you want a new card. In general, the better your credit, as indicated by your credit score, the better rate you’ll be able to get. This is because the credit card company will view you as a lower risk than someone with a lower score.
When you’re shopping for a credit card, knowing your credit score and what category it falls into (such as excellent, good, fair or poor) can help you determine which cards you may qualify for and what types of interest rates they may have before you apply.
You can get your credit score for free from a variety of websites and even some credit card companies. Note that your credit report, which you can also get for free at AnnualCreditReport.com, does not include your credit score.
Credit Card Debt Repayment Scenario-
Let’s say Riya and Tina both have $2,000 balances on their credit cards that require a minimum monthly payment of 3% or $10, whichever is greater. Both are short on cash, but Tina manages to pay the extra money like $10 on top of her minimum monthly payment. Riya only makes the minimum payment.
Riya and Tina are charged interest on their card balances each month at 20% APR. When they make payments, a portion of their payment goes to pay interest and a portion goes toward the principal (their balance).
Here’s a breakdown of Riya’s first month of credit card debt data. For simplicity, we’re calculating interest on a monthly basis rather than daily
Because Tina contributes an extra $10 per month, she’ll pay a total of $3,276 over seven and a half years to cover her original $2,000 in credit card debt. Her interest expense will total $1,276.
The extra $10 per month saves Jane $1,000 compared to John, and reduces her repayment period by more than seven years.
The lesson here is that every little bit counts. Paying double or more of your minimum can drastically cut down on the time it takes to pay off the balance, reducing overall interest costs.
Of course, while it’s good to pay more than your minimum, it’s better to have no balance at all.
Why pay off your balance in full?
As an investor, you’d be thrilled to get a 17% to 20% annual return on a stock portfolio, right? If you’re able to maintain this type of return over the long term, you should probably run a hedge fund.
Paying off a credit card balance is like getting a guaranteed return on your investment. If your credit card charges 20% interest per year and you pay off the balance, you guarantee yourself a 20% savings, which in a way equates to a 20% return.
So, when you have some extra cash, it’s almost always better to use it to reduce your credit card debt than to invest it. If you can pay off your balance and stop paying interest on credit cards, you’ll have more money to invest in the future.
If you qualify, consider transferring your current credit card balance to a lower-rate balance transfer credit card. Many of these cards have a six- to 18-month promotional period in which they charge 0% interest on your balance, which can prevent further interest charges and allow you to pay off your balance faster. Be wary of any balance transfer fees, which can add 3% to 5% to your current balance.
How To Use Your Credit Card Right?
Keep the following tips in mind to avoid running into debt due to overspending on your credit card:-
- Read the instructions and terms/ conditions so that you are familiar with all the charges and terms governing your card.
- Try do not to spend more than you can afford to repay.
- Avoid making daily purchases on your card so that you know how much you are spending.
- Check your credit limit periodically and rein in spending when you cross 40% of your available credit limit.
- Opt for EMI options for big purchases made on your card to avoid paying interest on the outstanding card amount.
- Always keep at least 40% of your credit limit for emergencies.
- Plan your purchases as per your necessity and most useful items first on priory. Avoid making rash purchases on your credit card.
- Always try to pay your credit card bill in full every month to avoid interest charges.
- Never skip card payments, as it will result in higher charges and hefty penalties.
- Contact the bank if you have overspent on your card. They can help you create a repayment plan with a fixed interest rate to prevent you from going into debt.
Advantages and Disadvantages of Credit Cards-
Merits/ Advantages of Credit Cards-
Easy Access to Credit
The biggest advantage of a credit card is easy to access the credit facilities. Credit cards work on a deferred payment basis, meaning you can use your card now and pay for your purchases later. The money used doesn’t go out of your account, so your bank balance doesn’t go down every time you swipe.
Building a Credit Score
Credit cards give you the opportunity to build a credit line. This is very important because it allows banks to see an active credit history based on your card payments and card usage. Banks and financial institutions often look at credit card usage as a way to assess the creditworthiness of a potential loan applicant, making your credit card important for future loan or rental applications.
EMI Facility
If you are planning to make a big purchase and don’t want to put your savings into it, you can choose to put it on your credit card as a way to defer payment. Additionally, you can also choose to pay for your purchase in equal monthly installments, ensuring that you are not paying for it in a lump sum and draining your bank balance. Paying via EMIs is cheaper than taking a personal loan for purchases like a television or an expensive refrigerator.
Promotions and Offers
Most credit cards are packed with offers and incentives for using your card. These range from cash back every time you swipe the card to collecting reward points, which can later be redeemed as air miles or used to pay off your outstanding card balance. Lenders also offer discounts on credit card purchases, such as flight tickets, holidays or big purchases, helping you save.
Flexible Credit
Credit cards come with an interest-free period, which is a period during which no interest is charged on your outstanding credit. If you pay off the entire outstanding balance of your credit card bill by the due date, between 45-60 days, you can get free, short-term credit. This way, you can benefit from credit advances without paying the costs associated with carrying a balance on your credit card.
Record of Expenses
A credit card records every purchase made with the card, with a detailed list sent with your monthly credit card statement. This can be used to determine and track your expenses and purchases, which can be useful for budgeting or tax purposes. Lenders provide instant alerts whenever you swipe your card, detailing the amount of credit still available as well as the current balance on your card.
Purchase Protection
Credit cards provide additional protection in the form of insurance for purchases made with the card that may be lost, damaged or stolen. If you wish to file a claim then the credit card details can be used to verify the authenticity of the claim.
Demerits of Credit Cards
The Minimum Payment Trap
The biggest disadvantage of credit cards is the minimum payment amount shown at the top of the statement. Many credit card holders are tricked into thinking that the minimum amount is the total they must pay, when in fact it is the minimum amount the company expects them to pay to continue receiving credit facilities.
This causes customers to assume their bill is low and spend even more, accumulating interest on their outstanding balances, which can add up to a large and unmanageable sum over time.
Hidden Costs
Credit cards seem simple and straightforward at first glance, but they have a number of hidden charges that can increase overall expenses. Credit cards have a number of taxes and fees, such as late payment fees, enrollment fees, renewal fees, and processing fees. Failing to pay a card can result in a penalty and repeated late payments can even result in your credit limit being reduced, which would have a negative impact on your credit score and future credit prospects.
Easy to Overuse
With revolving credit, since your bank balance stays the same, it can be tempting to put all purchases on the card, leaving you unaware of how much you owe. This could lead to overspending and owing more than you can pay, starting the cycle of debt and high interest rates on your future payments.
High Interest Rate
If you don’t pay your debts by the billing due date, the amount is carried over to the next business day and you are charged interest. This interest accrues over a period of time on purchases made after the interest-free period. Credit card interest rates are quite high, with the average rate being 3% per month, which would equate to 36% per year.
Credit Card Fraud
Although not very common, there are chances that you may fall victim to credit card fraud. With advances in technology, it is possible to clone a card and gain access to sensitive information through which another person or entity can make purchases using your card. Review your statements carefully for suspicious-looking purchases and report to the bank immediately if you suspect card fraud has occurred. Banks often reverse charges if fraud is proven, so you won’t have to pay for purchases charged by the thief.
Final Words/ The Bottom Line-
Credit card interest is a debt trap because of the high interest rates that credit card companies charge on unpaid balances. Carrying a credit card balance from month to month will result in exorbitant costs that can be difficult to pay off, which is why there is a huge household debt problem in the U.S.
It takes prudent financial management to avoid high interest charges and pay off your credit card bill every month. If you feel like you can’t afford to pay your credit card bill every month, it’s important to set a budget and spend within your means to avoid accumulating debt.
FAQ about ” if i pay off my credit card in full will i be charged interest”
How Much Is Interest on a Credit Card?
The interest charged on a credit card will vary by card company, card, and individual. Investopedia’s database puts the average credit card interest rate at 24.37% as of March 2024.
How Do You Avoid Paying Interest on a Credit Card?
There is only one way to avoid paying credit card interest and that is to pay off your credit card balance in full each month. When you pay off your balance in full each month, you don’t carry it over to the next month, so a card company can’t charge you interest. You are only charged interest on the balance from one billing cycle to the next.
Do You Get Charged Interest on Your Card if You Pay the Minimum?
Yes, you get interest on your credit card balance even if you make the minimum payment. If you make the minimum payment on your card each month, you won’t be charged any fees, but you will be charged interest on the unpaid amount.
For example, if you have a $500 credit card bill and the minimum required payment is $30, and you pay $30, you now owe $470. If you carry this $470 over to the next billing cycle, and the interest on your card is 20%, $94 in interest will be added to your initial balance, for a new balance of $564. This example is for simplicity, and not exactly how a card company would charge you interest.
Good Luck ………
Yours True Friend & Finance Advisor
Harry Bhagria
About Me...
My interest in finance and business started early since childhood. I have
extensive experience managing finances, running businesses and advising on
loans. My expertise includes Credit Cards, Business Loans, Personal Loans,
Vehicle Loans, Education Loans and the Stock Market.
My main Objective, Aim & Goal of life is to share my knowledge with everyone,
even those unfamiliar with finance, so they can understand how to effectively
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