Our needs and wants will always have a cost. How we pay for them, however, will differ.
One of these options is to use our credit card. A bank’s credit line allows clients to pay for their purchases and settle them later.
But there’s always a catch. Let’s consider that credit cards are liabilities; whether it’s expensive or cheap, our purchases often come with interest, or the amount on top of the original price.
So, what exactly are interest rates? Is there a way to dampen their financial impacts? Keep reading to find out.
Credit Card Interest
Interests are a bank’s charges for lending money through your credit card. These rates indicate a percentage of the purchase price the bank will add to your payables by the due date.
Credit card interest rates vary per bank, prevailing market rates, client credit score, and other factors. Even though these will sound like it’s not a liability, using a credit card doesn’t always mean that you’re accountable for paying interest on your purchases.
Type of interest rates
As mentioned, interests are amounts banks charge under specific settlement circumstances. Interest rates come in different types:
Purchase rate – The purchase rate quantifies how much you will pay for any unsettled balance after your statement’s due date. That means a client who fails to pay the required amount on or before its scheduled payment date will pay more than its outstanding balance.
Balance transfer rate – Clients may become liable for balance transfer rates when they assign their balances from one card to another. Here, banks charge different percentages from the usual purchase rates.
Cash advance rate – On top of withdrawable savings balance from debit cards, banks now allow their clients to withdraw cash off their available credit limits. However, banks impose cash advance interest rates for any amount withdrawn against the credit line. These interests can be more burdensome as they accrue upon withdrawal and range significantly higher than purchase or balance transfer rates.
Penalty rate – Banks also impose penalty interest rates on customers who fail to pay their minimum dues on time. Another scenario is when clients violate the cardholder’s terms and agreement with the bank.
Tips to Avoid Paying Interest
Yes, credit card interests are avoidable. Here’s how to do it:
Pay in full monthly – This concept explains the basics of restraining interest charges on your statement. You won’t be liable for purchase interests if you pay in full and on time.
Strategize major purchases – Financing huge expenses using a credit card requires immense planning. You can achieve this by looking for 0% interest installment purchases, deferred interest financing, or “Buy now, Pay later” plans.
Debt repayment – Debt repayment means organizing your credit card debts from the highest to lowest interest accruing. Settle every minimum payment required for every debt account. Then, use your extra money to pay more, beginning with your highest-ranked debt.
Credit cards are a privilege to purchase items with our commitment to settle them later. But these do not entitle us to buy things recklessly. Although the credit limits and perks sound fascinating, we should remember that these come with interests and risks.
Let’s be responsible cardholders and share this literacy with others.
