What is interest?
Credit Card services allow you to borrow money. In return, Credit Card providers Charge you a percentage fee on the money you borrow.
This fee is the interest rate that is applied if you don’t pay the whole balance outstanding on your Card in the given month. This interest is charged on your outstanding balance and not on the total money you borrow.
What is APR?
APR stands for Annual Percentage Rate. It is a simplified way of calculating the amount of money you pay on money borrowed. It is a useful tool if you want to compare a variety of loans – including Credit Card payments and mortgages.
Effective APR is the interest rate you pay coupled with annual account fees and transaction fees that are added to the balance. This is the best estimation of the total costs for a balance on your American Express Credit Cards.
A Fixed APR means that the Credit Card provider has to provide 45 days’ notice to you if they intend to change the interest rate. The new interest rate will only apply for purchases after the new rate change is applied.
A Variable APR has flexible interest rates, based on index interest rates. This is combined with the Credit Card issuers own rates and varies based on promotional offers. It also depends on benchmark index.
APR on Credit Cards
Even if you intend to keep a regular Credit Card repayment schedule, you should always check the APR to find out what you will pay each month. Cards with a lower APR tend to have less reward and loyalty programs but this can be a useful trade-off for some consumers.
How can I calculate the interest on a Credit Card balance?
The easiest way to calculate Credit Card interest is by using the APR. By comparing APR, you can find the best Credit Card for your own uses. Different APRs apply to different uses such as, cash withdrawals, balance transfers and purchases. If you intend to use your Credit Card primarily for purchases, then you will want to look for the lowest APR on purchases.
Monthly or daily interest rates are also used by companies to calculate the interest on outstanding balances.
- If your Credit Card has an APR of 19% you can calculate the daily interest rate by dividing 19% by 365. This gives you a daily APR of 0.05%
- If you had an outstanding balance of 1000 on your Card you would be charged
15.62 in interest. This is calculated as taking the APR of 0.05% times the monthly billing days (30)
- The more of your outstanding balance you repay each month, the less interest your Credit Card will accrue.