Interest Charge


Annual Percentage Rate (APR) is the cost of credit. If you carry an unpaid balance, the APR is your best indicator of account costs. The higher your APR, the more you will pay in interest charges. An APR of 18% on purchases doesn't mean you're paying 18% every month; it's what you would pay over the course of a year. With an 18% APR, each month you would be charged 1.5% as a interest charge on the open balance.

Variable rates are when your APR is tied to a specific index such as the Prime Rate. It causes your APR to move up and down over time. A variable rate credit card will often have an interest rate like "Prime + 5.9%." This means that the interest on the card is the Prime Rate, plus an additional 5.9%.

Your rate can also change due to your Card Agreement terms or upon written notice from the company.

You can avoid interest charges on purchases and late fees by paying your balance on time and in full each month. Sometimes you may want or need to make a big purchase that you can't pay off all at once, though, that's one of the main reasons to have a credit card–it lets you carry a balance. Make sure to factor the payments into your budget when you're planning a large purchase. That way you can plan how long it will take to pay off the purchase. Don't forget to calculate interest charges. They become part of the purchase cost.

Interest charges can be calculated in different ways. Your account statement describes the method that applies to you. In general, interest charges are based on one of the methods below.

Average daily balance:
Many credit card companies use this method. The credit card company totals your balance each day during the billing cycle, adds these balances together and divides by the number of days in the period.

Adjusted balance:
The credit card company subtracts payments you make during the billing cycle from your balance at the beginning of that period. This means your balance is kept lower and you pay less in interest charges.

Previous balance:
This method applies the monthly interest charge to your beginning balance for the billing cycle. Purchases and payments during the month aren't included.

Ending balance:
The credit card company may use your ending balance for the billing cycle. If so, any purchases and payments during the billing cycle are included.