The Ins and Outs of Credit Card Interest

You may reach for a credit card multiple times a week. They are a convenient and flexible payment option for both every day and extraordinary purchases. However, understanding the intricacies of credit card interest is crucial to avoid falling into debt traps and to maintain a healthy financial profile. 

Key terms to understanding credit card interest

Interest and annual percentage rate (APR)

Credit card interest refers to the cost of borrowing money from a credit card issuer. When you make a purchase using your credit card and carry a balance beyond the billing period's due date, the issuer charges interest on the remaining amount. The interest rate, or the annual percentage rate (APR), is expressed as a percentage and can vary based on factors such as your creditworthiness and the type of credit card.

Credit card interest is calculated based on the average daily balance, which considers the outstanding balance each day throughout the billing cycle. The interest is typically added to the balance at the end of each billing cycle if the full statement balance is not paid by the due date.

Billing period

The billing period is the timeframe during which your credit card purchases are recorded for a billing cycle. This period is typically around 30 days. At the end of each billing period, your credit card issuer generates a statement outlining your transactions, outstanding balance, minimum payment, and due date. 

Minimum payment

The minimum payment is the smallest amount you must pay each month to keep your credit card account in good standing. It is usually calculated as a percentage of your outstanding balance or a fixed amount, whichever is higher. 

While it may seem tempting to pay only the minimum, it's important to realize that doing so can lead to costly interest charges in the long run. By paying just the minimum, you extend the time it takes to repay your debt, and interest accumulates on the remaining balance.

The importance of on-time payments 

Your credit score plays a pivotal role in determining your creditworthiness. It is a numerical representation of your credit history, and credit card usage heavily influences it. Failure to make timely payments or carrying a high credit card balance can negatively impact your credit score. 

Paying more than the minimum payment and keeping your credit card utilization rate low are effective ways to boost your credit score. A higher credit score not only improves your chances of getting approved for loans but also enables you to access credit at more favorable interest rates.

Understanding credit card interest is crucial for responsible money management. By grasping the key terms associated with this topic, you can make more informed decisions about your finances. Remember that paying only the minimum payment can lead to costly interest charges, whereas maintaining a good credit score enhances your financial standing. Additionally, paying your credit card statement balance in full by the due date helps you avoid accumulating interest on your remaining balance.

General Electric Credit Union (GECU) credit card holders have access to a wealth of tools and resources that make payments and strategizing simple. Use Online Banking or our mobile app¹ to submit one-time payments or set up automatic payments. Plus, lean on Money Management – available in both online and mobile banking – to track spending and debt payoff.