Interest
Interest is the cost of borrowing money, typically expressed as a percentage of the amount borrowed, that lenders charge to borrowers for the use of their funds. This is evaluated within APR, Interest & Fees.
Plain-Language Meaning
Interest represents the extra money paid by a borrower to a lender in exchange for using the lender’s money over a period of time. It is usually calculated as a percentage of the outstanding balance.
Practical Example
If you carry a balance on your credit card from one month to the next, you pay interest on the amount you owe, which increases your total repayment amount beyond what you originally spent.
What It Does Not Mean
Interest does not refer to fees, penalties, or charges unrelated to the cost of borrowing money, nor does it describe the principal amount borrowed itself.
How the System Uses It
The system uses interest to determine the additional amount owed on outstanding credit card balances, applying the stated rate to the unpaid portion each billing cycle to calculate the total cost of borrowing.
Common Misconceptions
- “Interest is only charged if you miss a payment.” Interest can accrue on any unpaid balance, even if payments are made on time but not in full.
- “Interest rates are always the same for every transaction.” Different types of transactions, such as purchases, cash advances, or balance transfers, may have different interest rates.
- “Paying the minimum payment avoids all interest charges.” Paying only the minimum usually results in interest charges on the remaining balance.
Related Pages
Related Glossary Terms
FAQ
- How is interest calculated on a credit card? Interest is typically calculated using the card’s annual percentage rate (APR), applied to the average daily balance or the balance at the end of the billing cycle, depending on the card issuer’s method.
- When does interest start accruing on credit card purchases? Interest usually starts accruing after the payment due date if the full statement balance is not paid; purchases may have a grace period during which no interest is charged if the balance is paid in full.