Credit cards are more common than ever before. However, plenty of people don’t understand how they work. This misunderstanding leads to a lot of confusion about interest charge on credit card balances. In this guide, we’ll go over the factors that affect the interest rate on plastic money. After reading, you can make more informed decisions about your credit card usage in the future.
Understanding Types of Interest
Annual Percentage Rate (APR) is the yearly interest charge for borrowing money. That means your interest will be compounded monthly, quarterly, semi-annually, and annually. APY is called the Annual Percentage Yield, calculated daily. The lower your credit score, the higher your APY.
Credit Card Eligibility & Requirements
Eligibility depends on credit score, length of credit history, credit utilization ratio, and payment behavior. Paying your balance in full each month (using the card for purchases but not borrowing money), carrying a low balance on your credit card, and paying bills on time will help improve your credit score.
Many Americans are struggling to make payments or need more time to pay off a large purchase. So it may be worth exploring other financing options before applying for a new credit card with a high-interest rate. SoFi experts state, “Some credit cards offer an introductory 0% interest rate. But once that promotional period ends, paying your balance in full each month is how you can avoid interest charges.”
Adding The Term APR To Knowledge
Credit card issuers set a credit card purchase APR based on your creditworthiness. FICO scores are 3-digit numbers between 300 and 850 that determine your creditworthiness. So if you have a low FICO score, you’ll receive a higher APR than someone with a high FICO score. It can also depend on the type of credit card you have and the terms of the account.
Changing Of Credit Score And Interest Rate
The first factor is the credit score. The higher the credit score, the lower the interest rate you’ll pay. So if you have a 750+ credit score, then you’re in luck.
The second factor is how much of your credit limit you use. If you max out your card and use over 50% of your limit, it will be challenging to maintain a good credit score, and you’ll end up paying higher interest rates.
Repaying Your Credit Card Balance
Your credit card will charge interest if you carry a balance from month to month. The interest charge amount depends on your APR and the balance you carry.
Tips For Maintaining Good Credit Score and Ratio:
- Pay Your Balance In Full Every Month – Paying your balance in full every month is the most important thing you can do to protect your credit score and save money.
- Keep Debt Under 30% of Credit Limit – You should aim to keep your debt under 30% of your available credit limit.
- Regularly Check Your Report – TransUnion, Experian, and Equifax must provide you with a free annual credit report.
- Avoid Closing Old Accounts- Closing old accounts could lower your average account age, negatively affecting your credit score.
- Don’t Open Too Many Cards At Once – Opening too many cards at once can harm your credit score.
Open up only one new account at a time, and try not to close any old accounts. Also, make sure you pay off all balances in full and try not to exceed 50% of your total credit card limit.
It is important to Know all terms & conditions before applying for new cards. This way, you can be sure that you are getting the best deal possible and avoid any unwanted surprises.