Today in our Credit Card Management Series we are going to discuss a very important aspect of any credit card.  We have already discussed Prepaid Credit Cards, Solutions to Credit Card Debt, as well as Good and Bad Reasons To Have Credit Cards.  The most important aspect when choosing a good credit card is the interest rate.  It is important that we know how interest rates are charged on our credit cards, it is also important that we fully understand how our interest rates are calculated.

What is an Interest Rate?

An interest rate is defined as the rate charged by credit lenders to credit borrowers for use of the credit card.  The interest rate on a credit card is an Annual Percentage Rate (APR) which can be any amount from 0% up to 24%.  Interest rates depend on current promotions as well our personal credit rating; interest rates on credit cards are non-negotiable.  Some credit card companies and financial institutions may offer a low rate credit card for an annual fee.

Interest rates are never fixed and can change at any time.  Some credit card companies and financial institutions automatically increase the interest rate on our credit card if we are late making payments, or if we do not make our monthly payments.

How is Credit Card Interest Calculated?

Interest rates are expressed in an annual percentage, but it is charged daily.  Our monthly interest rate is charged on our average daily balance throughout the month.  If our annual interest rate is 19.99% then our daily interest rate would be 0.054%. 

Credit Cards usually offer 0% interest during our purchase grace period.  This means that from the date of our purchase we could have between 17 to 23 days of 0% interest to pay off our credit card balance before we start to be charged interest.  This interest free period is better known as the grace period. 

If we make a purchase on March 10, and our interest free period is 21 days, we have until March 31 to pay off our purchase in full before we start being charged interest on a daily basis. 

Interest is charged differently depending on how we use our credit card.  The 0% interest free grace period usually only applies to purchases.  If we use our credit card for cash advances or balance transfers we may start to be charged interest as of the first day.

Can I have 0% Interest on My Credit Card?

The answer is Yes, there are several ways that we can use our credit card interest free.  If we pay our credit card balance in full each month before the payment due date we will not be charged any interest.  The time between our statement date and the payment due date is the interest free grace period.  If we make only the minimum monthly payment we will be charged interest on any remaining balance that is not paid off in full by the payment due date.

Several Credit Card Companies and Financial Institutions offer introductory rates of 0% interest for a limited period of time. Citi Bank is currently offering a 0% interest rate on all purchases for the first 12 months on the Citi Thank You Preferred Card.  TD Bank  is currently offering an introductory rate of 0% interest on all balance transfers for the first 6 months on the TD Payment Plus Visa Card.

It is a good idea to check the current interest rates with your financial institution before you decide to apply for a credit card. No one was a big surprise in the form of a big interest rate.