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Understanding Credit Card Interest: A Guide by O1ne Mortgage

At O1ne Mortgage, we prioritize consumer education on credit and finance. This post aims to provide an objective view to help you make informed decisions about credit card interest. For any mortgage-related needs, feel free to call us at 213-732-3074.

What’s the Difference Between an Interest Rate and an APR?

The terms “interest rate” and “annual percentage rate” (APR) are often used interchangeably, especially with credit cards. However, they can differ with other loans. While the interest rate is the annual cost of borrowing, the APR includes all finance-related charges, making it higher than the interest rate for loans like mortgages, auto, or personal loans.

Different Types of APRs on Credit Cards

Credit cards can have various APRs depending on their use. Here’s a summary:

Purchase APR

This is the interest rate on new purchases. If you pay your bill on time and in full each month, you can avoid this APR due to the grace period offered by most credit card companies.

Balance Transfer APR

This APR applies to balances transferred from other credit cards. Typically, there’s no grace period, and payments are applied to the balance with the highest APR first.

Introductory APR

Many credit cards offer a low or 0% introductory APR on purchases or balance transfers for a period ranging from six to 21 months.

Cash Advance APR

This set APR is higher than purchase and balance transfer APRs and accrues interest from the transaction date.

Penalty APR

The highest interest rate a credit card charges, triggered by missed payments. It remains in place for at least six months.

How Is Credit Card Interest Calculated?

Calculating credit card interest involves several steps:

1. Calculate the Daily APR: Divide the APR by 365 (or 360, depending on the issuer).
2. Calculate Your Average Daily Balance: Sum your daily balances and divide by the number of days in the statement cycle.
3. Multiply Your Daily Periodic Rate by Your Average Daily Balance: This gives your daily interest.
4. Multiply by the Number of Days in Your Billing Cycle: This gives your monthly interest.
5. Factor In Daily Compounding: Interest is compounded daily, but the first four steps provide a good estimate.

How to Avoid Paying Credit Card Interest

To avoid credit card interest:

• Pay your balance in full every month: Utilize the grace period to avoid interest charges.
• Use an intro 0% APR promotion: Pay off the balance before the promotional period ends to avoid interest.
• Avoid costly cash advances: Consider less expensive options as cash advances come with higher APRs and fees.

Credit card interest can be complex, but with careful management, you can minimize or avoid it. For personalized mortgage advice, call O1ne Mortgage at 213-732-3074.

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