When do credit cards charge interest?

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    Jordan Moore
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    #32512
    Jordan Moore
    Keymaster

    Credit cards charge interest if you don’t pay off the full amount you owe by the due date. 

    Here are two scenarios: 

    No interest charged — You have a $500 credit card statement due at the end of the month and you pay it off in full by that due date. In this scenario, you won’t owe any interest to your credit card company.

    Interest charged — You have that same $500 credit card statement due at the end of the month, but instead of paying it off in full you only pay the $15 minimum payment. That leaves you still owing $485 on your credit card. Assuming you have a 20% annual interest rate, that $485 would turn into $493.01 the next month, and that’s not including any new purchases you make on the card. 

    And if you’re confused about the interest rate, a 20% annual interest rate (also known as APR or Annual Percentage Rate) doesn’t mean you have to pay 20% of your balance each month. Instead, the interest is usually charged daily. 

    So the daily interest rate is your APR (20% in this case) divided by the 365 days of the year, leading to a 0.055% daily interest rate.

    That may initially sound low, but the interest will keep accumulating until you pay off your card, potentially leading to a lot more debt than you initially thought you’d have. That’s why it’s better to pay your card off in full or as quickly as possible if you do hold a balance.

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