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Credit Card Interest

What is credit card interest?

Credit card interest refers to the way in which card issuers earn their revenues by issuing credit cards to their customers. In simple terms, the credit card companies charge interest to all credit card holders who use their services through by making payments through credit cards. The interest rates are fixed on the transactions that you do. A card issuer refers to a financial institution or a bank that issues credit cards to its customers or clients. In this case the client is known as the credit card holder. The financial institutions suffer a loss when the cardholders do not pay their dues on dues on time. As a result the credit card companies draw out optimum calculation of interest plans for the customers. In case the customers do not pay their dues on time, the interest rate increases in the form of a penalty.

Interest Rates

In the UK when a customer would like to apply for a loan with a bank, the bank might check the credit report of the customer before sanctioning the loan. If the credit score on the credit report is bad then the bank may not sanction the loan as it does want to take the risk of non payment of loan with interest. The most vital reason for low credit score is non payment of credit card dues. The interest rates negotiated between the lenders and the borrowers tend to promote economies by facilitating the price mechanism of free trade. Some customers may confuse the interest rates as they tend to get confusing for the card holders. Hence it is very necessary that the card holder should fully understand the interest rate applicable on each transaction before shopping for anything with the use of their card. The interest rates may vary from company to company. Typical credit cards in the UK have interest rates ranging between 7% and 26%. The interest rates in developing countries are much higher in developed countries as the developing countries do not still make more use of their credit cards and the credit card companies have to make extra efforts and aggressive advertising and selling to make the customer avail their credit card services.

APR

APR is the principal means of comparing credit products. Interest on a credit card is normally compounded on a monthly basis. To calculate charges on the credit card the APR ahs to be decompounded. Let us take an example of interest rates on credit cards. If a card is advertised at a percentage rate of 16.945 then it rounded to 16.9. Once the number is derived, it is converted into a decimal multiplier. In this case the number will be 1.16945. Then to derive the monthly rate, calculate the twelfth root. This calculation will provide you with a rate, which when compounded over a year will give you the APR. the methods of calculation of interest may vary from country to country. Foe example, the Daily Accrual method is used in the UK. The annual rate is divided by 365 to give a daily rate. Each day, the balance of the account is multiplied by this rate and at the end of the billing cycle the interest accrued is billed to the account.

 
   



 

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