How to Navigate Credit Card APRs and Interest Rates

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Understanding Credit Card Interest: A Guide by O1ne Mortgage

At O1ne Mortgage, we prioritize consumer credit and finance education. This post aims to provide an objective view to help you make the best decisions regarding credit card interest. For any mortgage service needs, call us at 213-732-3074.

What’s the Difference Between an Interest Rate and an APR?

The terms “interest rate” and “annual percentage rate” (APR) are often used interchangeably, especially with credit cards. However, they can mean different things with other loans. While the interest rate is the annual cost of borrowing, the APR includes all finance-related charges, making it higher than the interest rate.

Different Types of APRs on Credit Cards

Credit cards can have various APRs depending on their use. Here’s a summary:

Purchase APR

This is the interest rate on new purchases. If you pay your bill on time and in full each month, you can avoid this APR.

Balance Transfer APR

This applies to balances transferred from other credit cards. Payments are typically applied to the balance with the highest APR first.

Introductory APR

Many cards offer a low or 0% APR for a limited time on purchases or balance transfers. These promotions can last from six to 21 months.

Cash Advance APR

This higher APR applies when you request a cash advance. Interest accrues from the transaction date.

Penalty APR

This highest APR applies if you miss a payment by 60 days or more. It remains in place for at least six months.

How Is Credit Card Interest Calculated?

Calculating credit card interest involves several steps:

1. Calculate the Daily APR

Divide the APR by 365. For example, a 16% APR becomes 0.00044 daily.

2. Calculate Your Average Daily Balance

Determine your balance for each day of the statement cycle, then average these balances.

3. Multiply Your Daily Periodic Rate by Your Average Daily Balance

Multiply the daily rate by the average daily balance. For example, 0.00044 x $1,200 = $0.53.

4. Multiply by the Number of Days in Your Billing Cycle

Multiply the daily interest by the number of days in the billing cycle. For a 30-day cycle, $0.53 x 30 = $15.90.

5. Factor In Daily Compounding

Interest is compounded daily, adding interest charges each day based on the previous day’s balance.

How to Avoid Paying Credit Card Interest

Here are some tips to avoid credit card interest:

• Pay your balance in full every month to avoid interest charges.
• Use an intro 0% APR promotion for large purchases or balance transfers.
• Avoid costly cash advances due to higher APRs and fees.

The Bottom Line

Credit card interest can be complex, but you can minimize or avoid it with responsible use. For personalized mortgage services, call O1ne Mortgage at 213-732-3074. We are here to help you make informed financial decisions.

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