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Credit Card Interest: Know How It Works

Michael Ringler

03/15/2022 — Download

Before you applied for a credit card you probably checked the interest rate. But do you know how the credit card company figures that rate—and others—into your monthly statements? Of course, credit card companies differ on what and how they charge in interest and fees, but there are some fundamentals that it’s good to know before you apply for a card, or even before you make your next payment.

• APR. The annual percentage rate, or APR, is defined as the annual cost of a loan, including your credit card. It is expressed as a percentage, and it is likely the percentage figure you considered before applying for a card. It is typically expressed as a yearly rate, though applied each billing cycle—typically monthly—to any unpaid part of your balance. Your monthly rate is simply one-twelfth the APR. For example, If you have an unpaid balance on your statement from the previous billing cycle and your APR is 24 percent, your bill will be increased by 2 percent of that previously unpaid or “revolving” balance.

• Minimum payment. Credit cards typically require a minimum payment by a certain due date. Those minimums are usually small—and often how consumers run up unmanageable credit card debt. But if you are stretched and can only pay a small amount, at least pay the minimum due. If you don’t pay it you will be assessed an additional fee, likely at a higher percentage rate than your APR. Missing a payment altogether, that is, missing the due date, will incur yet another fee, and could result in your APR being increased.

• Cash advances. If you use your card to withdraw cash from an ATM or other source, you will pay a fee. Again, that fee is usually a higher rate than for using the card to buy products or services.

• Balance transfers. A consumer with a large amount of debt on one card might be inclined to transfer that balance to another card, especially when the new card comes with a lower rate. Issuers often use special low rates to attract transfers, as low as 0 percent. Key to going that route is knowing how long the low percentage rate applies, which can be a year or even just a few months. As well, the issuer of the new card will charge a percentage of the balance you are transferring as a transfer fee, so figure that into your balance transfer cost. And of course be diligent: as the old adage goes, if you see an offer that looks too good to be true, it probably is.

A few other facts of interest:
• Your APR is generally based on your credit score. Again, every card is different, but generally speaking, the higher your credit score the lower your APR. Ways to improve your credit score include:
-Make your credit card payments on time.
-Apply only for cards you need and will use.
-Keep your balance modest. Experts suggest keeping charges at about 20 percent of your limit.

• Some cards come with a “variable” APR. Those rates are based on “prime,” a broadly used bank rate for borrowing money. As prime changes, so will your variable rate.

• Keep an eye on your card balances and activity. One of cyber criminals’ favorite activities is stealing, using, and selling credit card numbers. If you see a charge you didn’t make, call your credit card company immediately. And be wary of requests for your personal information, especially if they are offering some type of promotion or incentive, a popular way for scammers to get hold of and use your personal data.


The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

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The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.

HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.

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