We explain how the increase in interest rates from the Federal Reserve affects you if you accumulate credit card debt and what to do to minimize the impact.
It impacts from mortgages to loans for the purchase of cars.
As planned, the Federal Reserve raised interest rates for the first time since December 2018, this amid soaring inflation coupled with gasoline prices and the economic fallout from the war between Russia and Ukraine.
The central bank reported Wednesday that the fed funds rate now stands at 0.25-0.5%.
Credit cardholders will now find it more difficult to pay off a large debt, so you must understand how the Annual Percentage Rate (APR) is calculated and how it is applied to outstanding balances, to maintain the most control. possible on the growth of the debt.
That information could help you make decisions about which credit cards you can afford and how much it costs you each day to borrow from your credit card company. The monthly APR can also help you understand how much it costs you to carry a balance each month that you’re not paying in full.
THE THREE TYPES OF APR
The APR is calculated and determined by your credit card company. The three main types of APRs are fixed-rate, variable-rate, and promotional rate.
With fixed rates, your APR is likely to remain unchanged for as long as you have your card unless otherwise noted. In this case, the increase in the interest rate of the Federal Reserve could affect you.
Variable rates may increase or decrease based on federal rates.
Promotional rates include zero-interest or low-interest periods offered as incentives by companies to new account holders.
You can determine what fees are associated with your credit card by reviewing the agreement with your credit card company, as well as your monthly statements.
HOW TO CALCULATE THE MONTHLY APR
It can be done in three easy steps:
- Check the current APR and your balance on your credit card statement. You can call your bank if you don’t have that information.
- Divide your current APR by 12 (for all twelve months of the year) to find your monthly periodic rate.
- Multiply that number by the amount of your current balance.
Let’s say you owe $500 on your credit card for the entire month and your current APR is 17.99%. You can then calculate your monthly interest rate by dividing 17.99% by 12, which is approximately 1.49%. Then multiply $500 x 0.0149 to get an amount of $7.45 each month. Therefore, your bank would charge you $7.45 in interest charges based on your $500 balance.
HOW TO CALCULATE THE DAILY APR
As in the previous case, you can do it in three steps:
- Check the current APR and your balance on your credit card statement. You can call your bank if you don’t have that information.
- Divide the APR rate by 365 (for all 365 days of the year) to find the daily periodic rate.
- Multiply your current balance by your daily periodic rate.
For example, if your current balance is $500 for the entire month and your APR is 17.99%, then you would need to divide your current APR by 365. In this case, your daily APR would be approximately 0.0492%. By multiplying $500 by 0.00049, you will find that your daily periodic rate is $0.25. To calculate the monthly interest charges on your balance, you simply need to multiply this daily periodic rate by the number of days in your billing cycle. For most credit cards, the average billing cycle is 30 days.
These numbers can help you calculate the payments you need to make each month to minimize the impact of daily compounding.
WHY DO I NEED TO KNOW THE DAILY AND MONTHLY APR?
Your credit card balance can fluctuate daily, weekly, and monthly. By calculating your daily and monthly APR, you can better understand how much of your money is going to interest you. This is why credit cardholders have the feeling that they pay the minimum without this meaning that they advance enough to cover the total debt.
Having a clear understanding of how much of your money is going toward interest rather than paying off the debt in full can help you formulate a payment plan, as well as help you decide what really necessary purchases you can make with your credit card without affecting your finances.
By breaking down interest rates on a daily and monthly basis, you can learn more about the interest you’re accruing over time and use this information to make better financial decisions.