According to CNBC, credit card debt reached an upward of $4 trillion by the end of 2018. Credit card interest is really getting to people.
However, that is no surprise to financial experts because, by May last year, Americans were paying up to $104 billion in fees and interest to credit card companies. This is partly because interests rates can be quite high, with around 14.1% for the average interest and others as high as 30%.
The staggering numbers of credit card debt can certainly be overwhelming. The key to keeping your part of that grand total manageable is understanding how credit card interest works. Having a solid grasp on the interworkings of credit card interest will help you use your credit card better. This quick guide will get you started!
How Is Credit Card Interest Calculated?
To start, you should understand how interest is calculated according to the terms of your issuer. Most of the cards are calculated annually, that is what appears on your statement. But you should be more focused on your daily charge.
As we have seen, cards calculate anything from 14.1% to 30% interest annually. First of all, divide your interest rate (annually) by 365 (the number of days in a year). For example, if your interest comes to $0.11, that’s how much interest you’ll incur per day.
Multiply that with your balance and see how much that adds up to. For example, if your balance was $200; the next day, you’ll be at $200.11. By the end of the month, if you have no extra charge, your bill is $203.30.
Investing or Paying Interest?
Most investors struggle with the idea of whether to pay their interest or use the money to invest. But is it right to make significant investments and not pay off your credit card? Here’s the deal, incurring massive interest on your credit card, whether or not you’re making significant moves towards investments, can turn out to be costly.
Holding on to a high credit card balance can affect your investments in the long run. Unless you’re a world-class investor and you can pay it all off after a considerable trade, it’s a risk. But it all comes down to the fact that you should at least pay the interest rather than try to hold out for a huge payday to pay everything at once.
The Two Scenarios of Credit Card Interest
There is a minimum payment plan for each credit card, say 3% or more monthly. Say you have a debt of $1,000 and you only pay off the minimum of your credit, which is 3%. On the other hand, another person with the exact plan pays off not only the minimum but an extra % or more; who is likely to have a cheaper interest by the end of the year?
Of course, it is the one who pays a little bit extra. The trick is to try and pay double the % required of you for you to cut down on your interest over the year. Don’t be hard on yourself if you can’t make this happen every month. Life is unpredictable and we all have our months where budgets are tight or we fall behind. The key is to pay what you can when you can, no matter how big or how small the payment.
Credit cards are the cornerstone of the American economy for a reason; they’re quite essential to our everyday lives. A quick guide to understanding credit card interest can save you years of turmoil and huge amounts of debt. In interest terms, remember that every little bit that you put in to cut off your interest counts. You can also check your interest with this handy credit card interest calculator.