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Credit Card Bills Ė How to Understand Interest Rates

April 19th, 2006

Credit Card Bills Ė How to Understand Interest Rates

Save Money with Lower Interest Rates

If you have ever looked at your credit card bills there is a section usually on the very end of the bill listing several different interest rates.  The interest rates can add up to a lot of money, and finding ways to lower the interest rates is one way to reduce debt and eventually eliminate it.

Usually the credit card company will specify the finance charge for that month in the bill.  The interest rate is directly related to the finance charge.  The interest rate is calculated from separated transactions.  Depending on the current promotions rates on the same card can vary greatly.  You will notice there is breakdown rate for Balance transfers and checks, Purchases, Cash Advances at ATMís or Banks.

 

If they list the daily rate for the interest you will notice the interest rate is broken down from the larger Annual Percentage Rate (APR).  If your company does not give you a daily rate you can take the listed APR and multiply it by the current balance and divide by 12 months.  This will give you a rough estimate for the monthly interest you will pay at that rate.  There are more specific methods to calculating interest rates, but this gives you a way to easily figure it out.

Here is the equation using the example of 12.97% APR rate and a balance of $5,000.

5000 x .1297 = 648.50 (yearly APR rate)
648.50 / 12 = $54.04 (monthly interest fees)
648.50 / 365 = $1.78 (daily interest fee)

 

This amount will change from month to month as the interest rate can change and the balance principle goes down on the credit card.  It can give you an idea how much interest you will pay if you were to buy with a credit card to pay off later.  This can be extremely important to know how much interest you will pay so that you will be aware of the expenses of paying for it later.

Sometimes you could be unaware of the skyrocketed interest rate that is why every bill you receive from the credit card company should be reviewed for the interest rates.

Interest rates are should be a primary focus as one of the tools to get out of credit card debt.  By lowering your interest rate you could save thousands of dollars depending on the amount that you owe as well as the interest rate.

 

Letís say for instance that instead of an APR rate of 12.97% rate you have a 21.99% APR interest rate with a balance of $5,000.

5000 X .2199 = $1099.50 (yearly APR rate at 21.99%)
1099.50 / 12 = 91.63 (monthly interest fees)
1099.50 / 365 = 3.01 (daily interest fees)

Adjusting your interest from 21.99% down to 12.97% could give you an extra $37.59 savings in interest every month.  If you shopped around for promotional interest rates on your card could potentially save even more on the interest with low fixed rate APRís that can go for around 3.99% - 5.99% until the balance is paid off.  There usually is a transaction fee for a balance transfer, but when you have higher interest rates you will find that the interest savings will add up in the end.

Temporary 0% interest rates are great if you know you can pay off the balance in the 6 Ė 12 month time period that you have been given.  If you keep good records of when the expiration is due on these promotions you can transfer from one promotion to the next to avoid interest.  There are transfer fees that do add up, so if you have something for the long run you might want to consider a low interest fixed rate APR that lasts until the balance is paid off.

If you are looking for lower interest rate deals and promotions make sure you have a credit card that does not have pre-existing balances.  The lower interest rate balances are paid off first with the higher interest rate balances being paid off last.  The transfer would become in effective because you really donít lower your interest as much as you would like to.

 
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Nicole Wilson
Best Syndication

Books on Credit Card Debt

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