Revolving Interest (Credit Card Interest)

What is revolving interest? Revolving interest refers to the interest that a consumer is required to pay on revolving credit. Some examples of types of credit that are revolving are credit cards, lines of credit, department store cards, furniture cards, etc… Revolving credit is a type of credit that does not have a set number of payments and/or the available amount of credit does not necessarily decrease once a payment is made, that portion of the balance (and thus of the credit) is gone.

How does credit card interest work? Many credit cards will provide a grace period to pay the balance of your bill (usually 1 month). If you pay off the entire balance, you do not pay any interest. However, if you only pay the minimum payment due, or if you pay off less than the balance, you will be charged interest on the remaining balance. If your credit card company charges compound interest, this means that your credit card interest will eventually make your balance higher than what you spent and you will be charged interest on the interest in that balance as well as on the principal.

Once you carry a credit card balance from a purchase for more than a month, credit card interest will begin to compound monthly. This means that the interest rate is divided by 12 months and added to the balance on a monthly basis.

When you take a cash advance on most revolving interest credit products, interest will begin to compound on day 1 and will compound daily. This means that the interest rate is divided by 365 days and added to the balance on a daily basis.

Compound interest when making minimum payments can result in you paying interest on interest.
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Take this example: Let’s say you have a credit card with an annual interest rate of 23.99% (a typical rate), and you charge $1000 to it. After this charge, you make no other charges, but you only pay the minimum payment due each month. With the credit card interest you would not see your balance paid off until you have made 77 payments.

Revolving credit card interest is not only scary because of how it compounds but having high balances on revolving cards in proportion to your limits will damage your credit.

There are pros and cons to revolving credit. If you are able to pay off balances in full regularly, the ability to use these credit products when you need them can be very useful. However, if you are not able to do this, you can end up paying a lot of money on just line of credit or credit card interest alone.