Think about your monthly electricity bill. You use electricity throughout the month without paying for it. At the end of the month, DESCO sends you a bill. This is how a credit card works. It allows you to spend money even if you don’t have it at that moment.
How Credit Card Interest Works?
When you buy something using a credit card, the bank pays and sends you the bill at the end of the month. Now, you have two choices -
Either, you pay the full amount by the due date. You will get 30 to 45 days for payment depending on the bank.
Or, you pay a fraction of the money and the remaining amount will incur interest until it’s fully repaid.
This is where things get interesting. Annual Percentage Rate(APR) is the measure of the interest and any other additional fees charged by the bank.
Suppose, your credit card’s APR is 25% and you own the bank 100 BDT. Usually, people think interest will be 25 BDT in 1 year.
But in credit card interest is calculated on the amount due at the end of each day. Your daily interest rate will be (25/365)% = 0.0684%. Thus, your interest will be 28.35 BDT in 1 year. This extra amount would create a huge difference over time if your initial loan amount is high.
Breaking The Myth About Credit Cards
If you understand the interest system and avoid overspending, a credit card can be a handy financial tool, as long as you pay your bills on time.