Are You Interested in Your Interest?

Do you know, really know, what the interest rate is on your credit card? You might be surprised unless you check each and every month, on your statement, to determine precisely what your overall interest rate truly is.

Each month you are assessed interest on your credit card statement. Interest is the fee charged by your credit card company that allows you to borrow money with your credit card. Your credit card annual percentage rate (APR) is the rate of interest you pay to borrow that money. A part of your payment each month goes toward paying the interest on your loan and the remainder goes toward paying the principal of the loan.

The credit card APR is what the credit card companies quote to you. It makes it sound as though that interest rate is the annual interest rate, and that’s the one you need to look at. However, if you look really closely at your statement every month, you will see that sometimes the APR doesn’t always exactly work out as initially calculated. The rate can vary slightly.

Calculating APR can be complex and not easily understood at first glance. The credit card APR is the rate determined by the lending institution to pay them back for costs associated with loaning you the money. To compute the credit card APR, you need to take average compound interest rate covering the span of the loan term. A compound interest rate is what you end up with when you add the interest to your initial loan amount. Instead of “simple” interest, which is the opposite of “compound” interest, your original loan amount gets “combined” with the interest amount, and any other corresponding fees, to determine the amount the interest rate is calculated on.

Calculating APR can allow you to compare credit card APR offers. To assist you in calculating APR, software is available. You can download free calculating APR software from the web site of the Comptroller of the Currency Administrator of National Banks or you can purchase a calculation tool to help you decipher the formula.

Decisions made regarding calculating APR are regulated to ensure credit card companies follow certain guidelines when determining an interest rate for your loan, but some of those rules can be flexible. Pay attention to your statement every month to verify the interest rate you are paying is the one you agreed to.

You are considerably better off if you can manage more than the minimum monthly payment. The more you can pay toward your principal loan amount, the less money you will end up spending on interest.