What are Interest charges on Credit Cards?
Interest charges on Credit Cards –
Interest charges are fees applied to the outstanding balance on a credit card account. They are typically charged monthly and are calculated as a percentage of the outstanding balance.
For example, let’s say a person has a credit card with an annual interest rate of 18%. They have a balance of $1,000 on the card and make a minimum payment of $50 each month. If they only make the minimum payment each month and do not add any new charges to the card, it will take them over 21 months to pay off the balance, and they will end up paying an additional $241 in interest charges.
How does Interest work in Credit Cards?
Here is how the interest charges would be calculated:
- The monthly interest rate is 18%/12 = 1.5%
- The interest charges for the first month would be $1,000 x 1.5% = $15
- In the second month, the outstanding balance would be $1,000 – $50 + $15 = $965. The interest charges for the second month would be $965 x 1.5% = $14.48
- This process continues each month, with the outstanding balance decreasing by the minimum payment and the interest charges being applied to the remaining balance.
It is important to note that many credit cards also have a “grace period,” during which no interest charges are applied to new purchases if the balance is paid off in full each month. However, if you do not pay off your balance in full, the interest charges will begin to accrue.
In summary, interest charges are fees applied to the outstanding balance on a credit card account and are typically charged monthly. They are calculated as a percentage of the outstanding balance and can add up over time, making it more expensive to carry a balance on your credit card.
Featured Image Credit: Card Insider