How Interest Rates Work

Financing big purchases with a credit card, home loan or auto loan can be an efficient way to manage your budget.

Here’s a look at how interest rates are calculated for each type of financing.

Credit Card Interest Rates

Wondering how much carrying a balance on a credit card will cost you?  Take a close look at the card’s annual percentage rate, the yearly interest rate charged on a credit card.

Many credit card issuers use a daily periodic rate to calculate interest charges on a credit card account whenever you carry a balance.

The formula for the daily periodic rate (DPR) is a simple one. It’s the APR on your credit card for new purchases divided by 365.

Your average daily balance and the number of days in your card’s billing cycle are other important factors in determining your monthly finance charge. The monthly finance charge is the amount you pay for carrying a balance on a credit card each month.

If your credit is good, opting for a card with a 0% interest rate for several months is a good way to finance a large purchase.  You won’t pay finance charges but you may be charged a balance transfer fee of 3 or 4%.  Budget carefully and make sure you are able to pay off the full amount before the introductory period ends and the card’s much higher APR takes effect.

Home Loan Interest Rates

When shopping for a mortgage, check out the loan’s APR – which includes the interest rate plus certain fees.  You’ll find this information, which indicates that amount of interest you will pay over the full length of the home loan, in any ad describing the loan’s terms and in paperwork given to you by a lender.

You will be charged an origination fee on a mortgage and possibly other fees, like mortgage insurance. These fees can be paid separately, upfront, or they can be rolled into your home loan.

Make sure you understand how fees are handled with your home loan and how they may be factored into your monthly mortgage payment.

Auto Loan Interest Rates

Most auto loans use a simple interest formula when calculating your monthly car payment.  With a simple interest loan, your loan’s interest rate is only applied to the principal amount that you borrowed for your car loan. Paying ahead on your principal payments will help to lower the financing costs of an auto loan.

Making your payments on time, as agreed, every time, is a great way to build and maintain good credit because your payment history has the biggest influence over your credit scores. That’s why it’s important to understand how much you’ll be paying, and whether it’s within your budget to do so. If you want to know how your payment history is affecting your credit scores. You can also get a plan to build your credit based on your individual needs.