How Credit Cards Interest Work.
Before you make payment for your purchase, your credit card issuer must be contacted for approval. After a successful transaction with your credit card, your credit issuer sends your payment to acquirers through the network. The credit issuer gives the bill while the merchant receives payment through the acquirer. Then the acquirer charges you for the service. There is no specific fee charged by the acquirer. It varies based on merchants. This is why merchants are selective in their choice of credit card.
How card interest works.
Fixed Vs variable interest rate:
An annual percentage rate (APR ) credit card on a fixed variable will maintain a constant interest rate. Your credit card issuers can not change your fixed rate without giving at least 45 days notice. The rate on your existing balance can simply not get changed by your issuer. However, there are certain conditions that can make the change possible. Some of the common ones are – not being able to make payment in full and secondly when your promotional rate expires. This rule is backed by federal law.
How to calculate the interest rate on a credit card:
To know your interest rate, divide your annual percentage rate by either 360 or 365. Whichever sum you get is called a daily periodic rate. You can also get your monthly periodic rate by dividing the annual percentage rate by 12. Whichever way, multiply the rate based on the number of days on your billing cycle and your daily balance during the cycle.
Percentage rates make a difference:
With a rate calculator, you know the negative effects of a high annual percentage rate. If you carry a balance of $4,000, have an APR of 19% and pays $222 monthly; you will clear the balance within 22 months with $900 paid in interest. But if you pay with a 0 percent card, you will clear the balance within 18 months without an interest rate.
How does interest rate effect credit card balance? Let’s begin with a $5,000 credit card balance and a 19 percent interest rate.
To clear this $5,000 balance within 6 months, your monthly payment will be $880.12. Within 6 months, you must have paid $5,280.72, $280.72 is paid as interest. If the duration of the payment gets delayed, your monthly payment will go down while your interest keeps growing. If you lengthen the payment up to 21 months, your $5,000 credit card balance, you will end up paying $5,916.33 as a total. Your initial payment was just $281.73 but as the payment delay, you are paying an additional 18% balance.
Notice that the example above does not have additional purchase within the period of the $5,000 balance payment. You can notice how quickly interest builds.
Who is an authorized user?
This is someone who uses an account holders credit card but does not take care of the credit card bill. He is fully authorized by the account holder. His credit history and income are not considered while setting a credit limit.
Authorized users enjoy many benefits. You enjoy the convenience of credit card even if you personally do not qualify for one. Also, you spend without worrying about how to pay for the expenses. The primary account holder pays the bill. Example of this is when a parent pays for a child in college.
One disadvantage of being an authorized user is that if the account holder defaults either in payment, your credit score will be affected negatively. You will miss out on credit card rewards such as travel bonuses, airline miles, and cash back.
Again, you still discontinue being an authorized user once you are removed by the account holder or if the card is canceled. What if the account holder dies? This can bring many consequences such as having to pay unplanned balances and possible legal issues.
If you consider adding someone as an authorized user, there are a few things you should keep in mind. Below is a list of them.
1. You pay all the available balances on the card. If the authorized user to your account is not reasonable with expenses, you run the risk of paying big bills. This is a potential danger to your credit score.
2. You can set a limit to control expenses on your credit card. This is best for particular purchases such as paying for a textbook or buying groceries for your college child. There is no specific rule in the credit card agreement surrounding an authorized user. The credit card company needs to be contacted by the account holder for proper verification.
3. You can earn rewards from your credit card company as a welcome bonus for each authorized user added. Look out for that if you are interested in rewards.
4. Note that some credit cards charge a different annual fee for an authorized user. This means paying an annual fee both for yourself and the person you added to your account.