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3 Factors That Affect Credit Card Interest Calculations

When you apply for any type of credit card, the interest rate on it plays a crucial role. If you have a higher credit score, you might be able to benefit from a low-interest rate. However, if your credit score is low, you will end up paying a higher rate of interest on credit card debt incurred. If you carry a balance, you will have to pay interest on the same.

It is important to understand how the interest on a credit card is calculated. If you understand how credit card interest is calculated, you will be able to minimize the interest effectively.

What is APR?
First, you need to know what APR is. It is an annual percentage rate that is the amount of interest charged on your balance. It measures the interest over a period of time. It can be variable or fixed. Not all credit cards use a variable APR, a number of them use a fixed rate. A fixed rate will allow you to fix your interest and determine the amount you will be paying over a period. Variable APR depends on the index interest rates, which are based on the various other parameters related to the funds available in banks across the country. Variable APR varies according to the change in the prime rate. In order to calculate your interest, you need to know what is the APR on your borrowing.

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What are your monthly charges?
In order to calculate the interest on a credit card, you need to convert the APR into a daily percentage rate, which will be applied to each day’s balance. You can also divide the APR by 12 in order to calculate your monthly percentage rate, which can then be multiplied by the average daily balance. This will help you estimate the interest charges you are paying on your credit card dues. However, calculating monthly charges this way will not take daily compounding into consideration. This method can be difficult if your average daily balance keeps changing due to the addition of new charges or due to the removal of payments through the month. This method can give an estimate of the number of charges that are applicable each month if the balance remains fixed.

Reduce the interest charge
You can reduce the amount of interest by maintaining a low balance every day. The interest will be calculated on a daily basis; hence, if you can reduce the balance, you will have to pay a lower interest. You can work towards minimizing your interest payment every day. Alternatively, you can also make payments in your account at the earliest, without waiting for the due date. This will help to reduce the balance and bring down the amount of interest on it.

If you are know how your interest will be calculated, you can take steps to bring down the interest you will paying. Maintaining a low balance allows you to bring down the interest amount and to reduce the monthly payments as well. You can easily calculate the interest if you have a fixed APR, otherwise, you will have to determine the monthly APR and estimate the amount of interest.

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