Good terms: Understanding credit card interest.
We explain how it works and how to avoid it.
We know that responsible use of credit can lead to good things in the future. Over time, it can help you build a strong credit rating, which can help you gain access to things like an apartment, car loan or phone plan.
But what about credit card interest? When shopping around for a card, you might notice two or three interest rates advertised next to each option. And you may wonder, what’s that all about? Or, you might shrug them off and spend more time reviewing other features like whether a card has rewards or an annual fee.
Interest is one of those things that some people find confusing. Even if you understand the basics of it, it’s probably not something you’d like to spend a lot of time thinking about. However, knowing how it works can help you make sense of how your statement could be impacted if you don’t pay off your balance in full each month.
If you’re interested in learning about interest (specifically, how to avoid seeing it on your statement), read on. Below, we define it – a couple of the types that can be charged – and provide tips to help keep borrowing costs down.
In simple terms, credit card interest is the cost of borrowing money. It’s usually expressed as an annual percentage rate. That annual rate is then often broken down into monthly or even daily percentages to calculate how much interest would appear on your statement. So, if your account terms say that a 19.9% annual interest rate applies, the amount you may be charged monthly is actually lower than that.
Depending on the type of transaction, you can often avoid interest charges if you pay your balance in full before your next payment due date. However, some types of transactions start accruing interest right away.
Interest on purchases:
This is interest that’s charged on regular purchases made on your credit card ... Like your virtual fitness subscription, or those bucket hats that are back in style (rebuilding that 90s wardrobe takes time). Interest applies to these items if you don’t pay them off in full within the grace period (check back soon — we’ll be dedicating a future article to that) by the payment due date.
Tip: Avoid interest charges on everyday purchases by paying them off right away or putting a payment reminder in your calendar before the payment due date. And if you have a Capital One credit card, you can sign up for handy alerts to remind you when your payment is due.
Interest on balance transfers:
A balance transfer is a type of transaction that allows you to transfer part or all of a balance you owe on an account from one financial institution to another. Basically, your bank pays down a loan you owe elsewhere for you, and then adds that amount to the balance you owe them. It can be a good way to bring together amounts you owe to different lenders all in one place, or to take advantage of a low rate offer from your bank. Depending on the terms of your account, balance transfers can qualify for a grace period, or may start accruing interest right away like a cash advance (more on that later). So, make sure to check the terms before clicking “accept” on that balance transfer offer.
Tip: Many low-rate balance transfer offers expire after a while, so you should know the time period for which the low rate applies and the standard rate that applies after that. Also, have a plan to pay down the transferred balance.
Interest on cash advances:
When you use a credit card to withdraw cash from an automated teller machine (ATM), the amount typically doesn’t qualify for a grace period and often starts accruing interest right away (in addition to any fees that your bank or the ATM provider may charge). This also applies to other cash-like transactions on your credit card including access cheques, wire transfers, money orders, bets, lottery tickets, gambling or casino gaming chips – basically anything that can be easily exchanged for cash.
Tip: Cash advance rates are often higher than other interest rates, and interest on these transactions can add up fast, so try to limit them as much as possible.
We hope we’ve shed some light on how credit card interest works, and how being mindful of it can help you keep your balance in check. Stay tuned for the next article in this series, where we break down fixed and variable interest.