How Credit Card Issuers Calculate Interest

For a low-interest credit card, a card owner must examine how their credit score impacts their interest rate and how the credit card company calculates interest.

Grace periods and billing cycles

The grace periods and billing cycles are two concepts to understand how the card company calculates interest. When it comes to billing cycles, your card issuer divides the year into 12-13 cycles, each with 27-30 days.

The card company releases your account statement after each cycle. These statements include the amount of money you should pay by the due date, your balance, the interest, payments, and charges for the cycle.

A grace period is when the card issuer allows you to settle your bills with no interest. The grace period typically goes approximately 21 days after the end of the billing cycle. Moreover, it coincides with the due date of the payment. However, not all cards offer you a grace period. As a result, your purchases accrue interests each day after the time of the transaction. Balance transfers and cash advances also don’t have a grace period.

For this reason, balance transfers and cash advances start to accrue interest at APR. Fortunately, some cards give new cardholders a 0% introductory APR for 6-18 months on balance transfer transactions. However, there is usually a balance transfer fee that is a fixed percentage of your transfer amount.

Credit card scores could influence interest rates

Additionally, interest rates are proportional to the credit card owner’s score. Credits and lenders need a way to establish the amount of risk when giving you a credit line or loan. That is why they use the credit score.

Most lenders prefer to use FICO to rate your credit score. This system gives you a score from 300, which is terrible, to 850, which signifies perfect credit. Generally, scores below 580 are poor, and those 800 and over are excellent.

People who don’t use their credit cards or don’t have one can’t get a credit score. Many first-year college students fall into this category. Some card companies give beginners a high-interest rate as they can’t gauge their creditworthiness.

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