How much will your credit card actually cost

July 10, 2017
Credit card interest rates vary from person to person. Someone with a good credit history will be able to get a lower rate, while someone with a limited credit history or a poor credit score will usually be stuck with a much higher rate. Rates can also vary according to the type of credit card. Cards that offer rewards programs usually have slightly higher interest rates than more-basic cards.
How much will your credit card actually cost

So how much can you expect to pay in interest if you carry a balance from month to month?

The worst cards, in terms of interest payments, are rewards cards that offer “cash-back bonuses.” These cards have average interest rates of around 20%. That is even higher than student credit cards, which have an average interest rate of 19%. Travel rewards cards are usually 15%-16%.

If you miss payments, then your interest rate could rise to well over 20%. However, if you have a good credit score and make payments on time, you could be rewarded with a lower interest rate (of 11%-12%).

Interest rates can be a little deceiving

Most card companies list the annual percentage rate. This can be confusing because you will not usually carry the same balance for the entire year. It is more useful to be able to figure out how much the interest payment will be per day. This requires a bit of mathematics, but it is pretty simple. You need to divide the annual percentage rate by 365 to get the amount of interest that will accrue each day until you pay off the balance.

You can do this calculation to see how much you will be charged each day until you pay off the balance.

Grace periods

The good news is that most credit card companies will offer a grace period before the interest charges kick in. This means that the interest will not start building immediately. After the billing period, you will have time (usually two to three weeks) to pay off the entire balance. If you can do this, you will not have to pay any interest charges. However, if you do not pay off the entire balance (if you only make the minimum required payment), the interest charges will start adding up.

Alternatives

The problem with credit cards is that if you continue to carry a balance, the interest payments will continue to keep growing. An alternative is to borrow the cash that you need with an online personal loan. These loans have a quicker approval process than credit cards, and, since the borrowed amount is set, it is easier to plan to pay the loan back.

If you use credit cards regularly, it is important to understand the interest rate and how much it will cost you if you do not pay off your balance quickly.