What are the Interests Charged by Credit Cards

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  • September 30, 2019
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What are the Interests Charged by Credit Cards

There are many who wonder,  what are the interests charged by credit cards? What these people have to know is that the credit card is nothing more than a financing instrument, by which the bank allows the customer to pay without money and charge it at the close of the card summary, which varies according to the signed contract.

In this way, a user of a credit card can pay something today and, depending on the closing dates and expiration dates of the card, pay it after 45 days. Without a doubt, it is a good lever to finance them, but dangerous if we do not know how to control it.

What are the interests charged by credit cards?

As we mentioned, credit cards are financing instruments, financial products where beyond the convenience for the user, there is a business behind which is precisely who offers this service: the bank.

Like any financing instrument, along with loans or credits, for taking only two more common examples, its use generates interest . However, on credit cards in particular, if you pay the total account summary within the stipulated period, there will be no additional interest. If the customer, for some reason, cannot pay it, then the resulting balance will accrue interest that, in most cases, is quite burdensome.

Interest on arrears of credit cards

We could define the interest rate of a credit card as the price you pay for borrowing money. In general, those default interests start to run from the day after the payment due on the credit card summary, and only for the unpaid balance thereof.

Also Read: What is the Interest Rate on Cash Withdrawal from Credit Card

Interest rates on credit cards are usually expressed as an annual rate. This is called the annual effective rate (TEA), and on most cards, you can avoid paying interest on your purchases if you pay the full balance every month until the payment date.

In the case of unpaid balances, next month, in the summary of your credit card, the interest will be accrued at the expiration date of the payment after the one that generated the interest. And any payment that is made, if not complete, will be computed first to the payment of those interests and then to the payment of the capital that generates the interests, which causes the accrued and unpaid interest to be capitalized as new capital, and generate new interest on interest.

Current interest on credit cards

In economies with very high inflation, or hyper inflationary, there is what is called current interest.  Current interests are those generated from the day the transaction is made, either by purchases or advances in cash, with your credit card until the cut-off date. The current interest rate of the day the transaction was made is applied to the value of the purchase or advance.

In more or less orderly economies, one-month deferred purchases do not generate current interest. However, it may happen that payments made to gas stations and cash advances generate current interest, which is settled at the current rate.

Interest on financing

One of the great advantages of credit cards is the possibility of paying expenses and paying them in installments or months. In this way, the card finances us the purchase of the good or service we want, obviously charging an interest in the financing of said amount.

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