How Credit Card Interest Works – Part 1

Financial Learning | March 29, 2022 | 3 minutes read

Wondering how credit card interest works? You came to the right place. Financial expert Eric Rosenberg sheds light on common questions related to credit cards. Watch the video or read the transcript to follow or continue to “How Credit Card Interest Works – Part 2”.

Eric Rosenberg:

Hello, my name is Eric Rosenberg, and I’m here to talk to you today about how credit card interest works.

Credit cards are an important part of many people’s finances. Some people like them, some people don’t like them. We’re not here to judge how you’ve used credit cards in the past, what we’re here to talk about today is how to minimize and avoid credit card interest. So if you do use credit cards, you use them to your benefit, and you go into the experience with your eyes wide open with no surprise charges coming your way in the future.

It’s easy to pick on credit cards as a bad thing. There are many stories of people who’ve racked up huge credit card balances and wind up with hundreds or thousands of dollars in interest and years of payments to get out of debt. That is a very easy thing to do when you use credit cards if you don’t stick to a very strict budget. Credit cards let you spend money easily, you can go to the store and swipe for anything from groceries that you might need to that new TV or video game system, more fashion accessory you want. But before you go swipe, it’s important to know that you have the money to pay that expense.

Let’s talk about the good and bad of credit cards. Some good things they can help you do, you can make a purchase right away without paying cash. If you need groceries and pay a few days away, that could help you bridge the gap. They can help you delay paying for something until your next statement due date without paying any interest. There are fraud, liability, insurance and purchase protection benefits that come with some cards. For example, in the United States, by law, you are not required to pay for any unauthorized charges on your credit card account. That’s a huge benefit. You don’t get that with cash.

Finally, if you use a credit card well and always pay on time and keep your balances low, that can help you build credit. But on the flip side, there are some things that can cause trouble in the credit card world. Interest charges can be very expensive if you don’t pay off your balance in full by the monthly due date. Interest charges often exceed 20% APR, that stands for annual percentage rate. That means if you made a $100 purchase, by the end of the year, you would pay $20 in interest over 12 months.

There’s a possibility for more fees and surcharges like foreign transaction fees or over limit fees or late payment fees or return payment fees. There’s all sorts of fees that can happen with a credit card if you’re not careful. It’s another account to manage and worry about, and if you make late payments or miss payments or have high balances, they can hurt your credit rather than help it. Wow, time sure flies when you’re having fun, talking about credit cards. We’re out of time for today, but make sure to come back for part two, where we’re going to jump into the costs of interest when using credit cards, and how you can save money when using credit cards.