Credit card interest is a fee charged on purchases made to a credit account, determined by credit score and payment history. Interest rates vary and compound monthly, adding to the outstanding balance. Paying off the balance each month can result in a lower interest rate. Credit card companies earn income through interest and other fees. It’s important to control expenses and pay attention to statements.
Credit card interest refers to the monthly fees charged on purchases made to your credit account. Interest, as well as other fees such as an annual cardholder fee, are how credit card companies earn income. Credit card interest rates are often expressed in terms of the annual percentage rate of charge (APR), although most credit card companies compound interest on a monthly basis. The interest is then added to the overall outstanding balance, and if it is not paid that month, interest will be charged the following month because it has been compounded into the balance.
The amount of credit card interest that cardholders pay is largely tied to the cardholder’s credit score and his or her methods of paying credit card bills. Because interest rates on credit cards can vary widely, from a very low percentage up to 30% or more, credit card companies need a way to determine the interest rate they will charge. As a general rule, people with good credit history and high credit scores will be charged a lower credit card interest rate than someone with bad credit score. Your current employment situation is also an important factor in determining interest.
The other factor that determines the credit card interest rate a cardholder will pay is their past behavior in paying bills. If a cardholder pays off the card every month, he might have a very low interest rate, but that doesn’t matter, because he won’t be paying interest on the balance. Interest accrues on a credit card only when it isn’t paid each month. Someone who pays only the minimum balance, however, will likely have a much higher interest rate and will pay more credit card interest over time, because it will continue to be added to the balance each month.
It’s important to remember that credit card interest is one of the primary ways credit card companies earn income each month. It’s also one of the easiest expenses in life to control. Not charging for anything that can’t be paid off at the end of the month, for example, is a good rule of thumb to follow—unless it’s an emergency, of course. Credit card companies are generally required to notify their cardholders more than a month in advance if there are any changes to the card, such as an interest rate increase or a change in billing cycle length, and it is important pay attention to these statements as well.
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