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Calculating credit cards interest
American Middle Class

How Does Credit Card Interest Work?

The estimated reading time for this post is 215 seconds

Calculating credit card interest and how much it will cost you each time you swipe that credit card is quite simple.  Last week, I received a credit card offer in the mail from Wells Fargo. The proposal said that the Wells Fargo Cash Wise is the best cashback credit card ever.  The Card promised unlimited 1.50 percent cash rewards on purchases. Before calculating credit card interest and see how much that 1.5% cash rewards will cost you, let’s talk about the annual percentage rate or APR.

 Annual Percentage rate (APR)

The annual percentage rate (APR) is the interest credit card issuers charge you for using their card.  The APR can either be fixed or variable–fixed APR, as the name suggests, stays the same unless you miss a payment and variable APR is anchored to the prime rate, the interest rate banks charge their most creditworthy corporate customers.

 The Wells Fargo Cash Wise has a variable APR ranges from 15.74 to 27.74 percent based on your creditworthiness. Besides the interest you pay on purchases, credit card issuers charge different APRs on cash advances and other transactions.

Cash Advance APR 

It would be best if you avoid credit card cash advance.  A credit card is already the most expensive financial product to use. Credit card cash advance is like adding fuel to a California raging fire.  The Wells Fargo Cash Wise charges 5% for the amount of each cash advance.  And the cash advance APR is between 25.74% and 27.74% based on your creditworthiness.

Purchase APR

Each time you swipe your card, the interest meter is running if you carry a balance on your credit card.  The Wells Fargo Cash Wise’s APR on purchases ranges from 15.74 to 27.74 percent. 

Balance transfer APR: 

Credit card balance transfer is technically refinancing your outstanding credit card debt. It is probably the best way to take advantage of this era of cheap money.  The Wells Fargo Cash Wise gives you 0.00% introductory APR for 15 months, meaning you can transfer your outstanding balance to the card and pay zero interest for those 15 months.

The Wells Fargo Cash Wise does charge 3% of the amount of each balance transfer.  After that, your balance transfer APR will 15.74% to 27.74, based on your creditworthiness.

 How Much That 1.5% Cash Rewards Will Cost You

Here’s how to calculate your APR.  Credit card issuers use daily compounding, meaning they calculate and charge you interest every day on your carried balance. Let’s say your average regular purchase is $2,500 on your Wells Fargo Cash Wise and your variable purchase APR is 27.74%: 

Your daily periodic rate will be 0.00076 (APR/# of days or 27.74/365)

Your daily interest charge will be $1.90 ( Daily rate/average daily balance or 0.00076% x $2,500)

Lastly, your monthly interest will be $57.60 (daily interest charge/30-day billing cycle or $1.90×30)

If you spend $2,500 each month and carry the American consumer average credit card balance of $9,333, by the end of the year, you will earn about $450 ($2,500×0.015) *12) in cash rewards and pay about $2,600 ($9,333×0.2774) in interest charges.

Why Credit Card Debt is So Expensive

A credit card is expensive because of you and me. Nearly 70 percent of the gross domestic product (GDP) is consumer spending. We buy a lot of frivolous products, and we put most of them on credit cards.

To keep us spending money we don’t have, credit card issuers spend about $17 billion each year on marketing.

Interest rates across the board, excluding credit cards, are near historic low. The interest rate on the 30-year fixed-rate mortgage is at 3.55 percent.  The Fed Funds Rate, which is the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis, is at 2.25 percent.

Wells Fargo has access to really cheap money, but that privilege doesn’t trickle down to its credit cardholders. Wells Fargo is not the only credit card lenders charging exorbitant APRs. However, it makes itself the butt of the joke by charging such a high interest for a “Cash Wise” credit card.

 If you stop using the Wells Fargo Cash Wise credit card with the $9,333 outstanding balance, It will take you about 173 months or 14.5 years to pay it off, according to Bankrate.

 By making a monthly payment of roughly $220, you will end up paying $28,655 worth of interest alone. There is absolutely nothing wise about the Wells Fargo Cash Wise credit card.

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