Credit card interest charges are waived from the time you make a purchase. In fact, you can avoid interest charges altogether by paying your bills in full each billing cycle.
- When you open a new credit card account, the creditor assigns you an annual percentage rate based on your credit score.
- However, most credit cards have variable interest rates. This means that your account rate may change if the Federal Reserve changes its benchmark rate. When the Federal Reserve raises rates, your credit card rate can almost certainly follow that upward trend, even with good credit.
- Interest charges only apply if you begin a billing cycle with an outstanding balance.
- Even if you pay your balance in full in that billing cycle, interest charges still apply for the balance you carried throughout the billing cycle.
- In most cases, a creditor multiplies the periodic monthly interest rate by the “average daily balance” you carry.
- So if you start a billing cycle at zero and end it at zero, your average daily balance will be zero; not paying interest, as a result.
- On the other hand, if you begin a billing cycle with a balance and end it with a balance, the creditor multiplies the periodic interest rate by the average daily balance to determine the accrued interest charges.
Please note that this only applies to interest charges on regular purchase transactions. Those are the regular charges you make with your credit card. Other specialized stocks generally have a specialized Annual percentage rate (APR).
APR Types
Standard Purchase APR
When we mention: “APR for purchases” we refer to the standard rate that the creditor applies in regular transactions. Every time you load something on your card, it is a regular transaction, the interest rate is applied in the manner described above. If you cancel your transaction every month, the interest charges will not apply at all.
This is especially helpful for reward credit cards that tend to have higher APRs. So you should diligently pay off your balances each month. Otherwise, the rewards will not compensate what you will pay in interest.
Introductory APR / Promotional APR
This is a special rate that a creditor offers when a customer opens an account for the first time. If you have good credit, you can get cards that offer 0% APR for a period. In most cases, the promotional period lasts between 6 and 24 months.
Once the promotional period ends, your account reverts to the standard APR for purchases. In most cases, if you have a balance at the end of the promotional period, interest charges only apply to the remaining balance. In other words, you avoid having to pay interest on the debt you paid during the promotion. This is not the case if you have an account that has deferred interest charges, which is common with retail store credit cards.
Transfer APR
This fee applies when you transfer a balance from an existing credit card to a new one. Every time you make a debt transfer, you typically pay a balance transfer fee as well as a balance transfer APR. This fee is applied to the total amount immediately after making the transfer. So even if you pay off the balance within the first billing cycle, you’ll still have to pay interest.
The only time interest charges do not apply to these types of transactions is when you get a card that offers 0% APR on balance transfers during an introductory period. These “balance transfer credit cards” can be extremely helpful when you need to consolidate your debt.
APR for cash advance
This is the rate charged by a creditor each time you use your credit card to withdraw money at an automated teller machine (ATM). In most cases, creditors prefer that you use your credit card to make charges. However, if you need cash and cannot use debit due to insufficient funds, you can withdraw on credit.
Like the balance transfer rate, the cash advance APR is applied immediately. Expect to pay interest on the full amount you withdraw. In most cases, you must also pay a separate cash advance fee. This high cost is why most experts recommend avoiding cash advances.
