How Are Credit Cards Billed?
Credit cards are a very commonly used form of consumer credit. Consumers who use these cards should understand how their bills, particularly the interest rates, are calculated.
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Basics
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Credit cards are almost always billed on a monthly basis. Card users are charged interest on their purchases (usually measured as an annual percentage rate or APR), and can be charged different rates for different kinds of purchases.
Variable Interest Rates
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Cards can be issued with fixed or variable interest rates. The APR on a variable rate card changes whenever the bank's prime lending rate (the amount of interest it charges to its best customer) increases or decreases. These cards are billed interest.
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Fixed Rates
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Fixed rate cards have APRs that are not tied to prime lending rates. However, the APR on a fixed rate card may increase, especially if a card holder is late on a payment. "Fixed" rates are not synonymous with "permanent," and interest billed to a card holder's account can change even with these cards.
Monthly Accrued Interest
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Many cards bill interest as a function of a monthly rate. Monthly bills apply 1/12th of the card's APR to the average daily balance for that billing period. So, if a card has an average daily balance of $1,000, and the APR is 12 percent, that card's monthly bill would show a 1 percent (12/12) interest fee charge, or $10.
Daily Accrued Interst
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Daily interest is calculated in a similar way. The APR is divided by 365 and that number is multiplied by each day's balance to determine the interest charged.
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References
- Photo Credit Image by Flickr.com, courtesy of Andres Rueda
