Does interest rate matter if you pay on time?
Does APR matter if you pay on time? The short answer to this is no. Credit cards offer a grace period that allows you to make purchases with your card without incurring interest charges at the purchase APR rate, providing you pay off your balance in full by the payment due date each month.
If you pay off your monthly balance in full by each statement's due date, you typically avoid paying interest on your purchases. If you do carry a balance, your issuer charges you interest on the balance until your statement is paid in full.
Even though you paid off your account, there could have been residual interest from previous balances. Residual interest will accrue to an account after the statement date if you have a balance transfer, cash advance balance, or have been carrying a balance from month to month.
If you pay off the whole amount (the balance) owed on the card by the due date, you will not be charged interest on your purchases. But interest may be added for cash advances.
“If you pay your balance in full every month, then the interest rate on the credit card is irrelevant to your situation,” Roger Ma, a certified financial planner at lifelaidout® and author of “Work Your Money, Not Your Life,” tells Select.
A good APR is around 22%, which is the current average for credit cards. People with bad credit may only have options for higher APR credit cards around 30%. Some people with good credit may find cards with APR as low as 16%.
There's generally no harm in making payments to your credit card bill during your billing cycle. And it's always a good practice to pay your balance in full by your due date to avoid interest, late payment fees and dings to your credit.
On the one hand, you save money on accruing interest when you pay off a debt early, and your debt-to-income ratio will go down. However, some lenders charge a prepayment penalty for early payments, and using your spare income to pay off your loan early means it won't be available for other expenses.
The faster you can pay off a loan, the less it will cost you in interest. If you can pay off a personal loan early, it can lower your total cost of borrowing, potentially saving you a considerable amount of money.
Paying off the loan early can put you in a situation where you must pay a prepayment penalty, potentially undoing any money you'd save on interest, and it can also impact your credit history.
Why am I getting charged interest when my balance is zero?
Have you ever paid your credit card balance down and then found an unexpected interest charge on the next bill? That may be residual interest. Residual interest, also known as trailing interest is, in the most basic terms, the interest that's carried over billing cycles.
Most important: Payment history
Your payment history is one of the most important credit scoring factors and can have the biggest impact on your scores. Having a long history of on-time payments is best for your credit scores, while missing a payment could hurt them.
Penalty APR: A late payment can cause your interest rate to spike significantly higher than your regular purchase APR. However, penalty APRs may be reverted back to the regular APR by meeting certain requirements, such as making two consecutive payments on time.
It's possible that you could see your credit scores drop after fulfilling your payment obligations on a loan or credit card debt. Paying off debt might lower your credit scores if removing the debt affects certain factors like your credit mix, the length of your credit history or your credit utilization ratio.
Paying your balance more than once per month makes it more likely that you'll have a lower credit utilization rate when the bureaus receive your information. And paying multiple times can also help you keep track of your spending and cut back on any overspending before you fall into debt.
It's a good idea to pay off your credit card balance in full whenever you're able. Carrying a monthly credit card balance can cost you in interest and increase your credit utilization rate, which is one factor used to calculate your credit scores.
Having a 700 credit score puts you in the “prime” category for borrowing. According to Experian, the average rates for this category are 6.44% for new-car loans and 9.06% for used-car loans.
According to Rachel Sanborn Lawrence, advisory services director and certified financial planner at Ellevest, you should feel OK about taking on purposeful debt that's below 10% APR, and even better if it's below 5% APR.
No, a 26.99% APR is a high interest rate. Credit card interest rates are often based on your creditworthiness. If you're paying 26.99%, you should work on improving your credit score to qualify for a lower interest rate.
The date at the end of the billing cycle is your payment due date. By making a credit card payment 15 days before your payment due date—and again three days before—you're able to reduce your balances and show a lower credit utilization ratio before your billing cycle ends.
Is it bad to pay credit card early?
Bottom line. Paying your credit card bill early is not intrinsically good or bad, but it can help you avoid negative habits such as high credit utilization and late payments. Paying your credit card early won't directly influence your credit score, but it can help in creating good financial habits down the line.
The Consumer Financial Protection Bureau recommends keeping your credit utilization under 30%. If you have a card with a credit limit of $1,000, try to keep your balance below $300.
Paying off your credit card balance every month is one of the factors that can help you improve your scores. Companies use several factors to calculate your credit scores. One factor they look at is how much credit you are using compared to how much you have available.
Credit card companies report your balance to the credit bureaus every month, typically at the end of each billing cycle. If you make your payment shortly before your statement date, it could help reduce your credit utilization, which can help you increase your credit score or maintain good credit.
Pay your balance on time and in full
The number one strategy to avoid paying interest on a credit card is to pay your balance in full each month. This can be easier said than done if you're struggling to make ends meet, but it's an important practice to try and follow.
References
- https://www.schwab.com/learn/story/potential-winners-and-losers-higher-interest-rates
- https://www.businessinsider.com/personal-finance/will-mortgage-rates-go-down-in-2024
- https://www.latimes.com/compare-deals/banking/savings/7-percent-interest-savings-accounts
- https://www.forbes.com/advisor/credit-cards/when-is-the-best-time-to-pay-my-credit-card-bill/
- https://www.canada.ca/en/financial-consumer-agency/services/interest-rates-rise.html
- https://www.investopedia.com/terms/l/low-interest-rate-environment.asp
- https://www.chase.com/personal/credit-cards/education/interest-apr/residual-interest-on-credit-card
- https://www.dosslaw.com/definitive-guides/doss-law-llps-definitive-guide-to-usury-in-california/
- https://www.equifax.com/personal/education/debt-management/articles/-/learn/manage-high-interest-rate/
- https://www.usatoday.com/money/blueprint/credit-cards/what-is-a-good-apr-for-a-credit-card/
- https://www.forbes.com/advisor/personal-loans/high-interest-loans/
- https://www.nerdwallet.com/article/banking/what-is-the-fed-rate
- https://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp
- https://www.khanacademy.org/college-careers-more/personal-finance/pf-interest-and-debt/pf-interest-basics-tutorial/a/how-rising-or-falling-interest-rates-might-affect-you
- https://www.cnbc.com/select/best-time-to-pay-your-credit-card-bill/
- https://www.citizensadvice.org.uk/debt-and-money/borrowing-money/credit-cards/the-costs-and-charges-of-credit-cards/
- https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/economic-iondicators-and-the-business-cycle/costs-of-inflation/a/lesson-summary-the-costs-of-inflation
- https://www.cnet.com/personal-finance/credit-cards/advice/when-should-you-pay-off-your-credit-card/
- https://www.bankrate.com/loans/auto-loans/how-inflation-affects-auto-loan-rates/
- https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Inflation
- https://www.lendingtree.com/credit-cards/articles/apr-ranges-explained/
- https://money.com/what-7-percent-rates-mean-for-buyers-sellers-and-housing-market/
- https://www.ccn.com/analysis/projected-us-interest-rates-in-5-years/
- https://www.finder.com/mortgages/400000-mortgage
- https://www.indiainfoline.com/knowledge-center/financial-planning/how-to-control-inflation
- https://www.cnbc.com/select/can-you-pay-off-a-personal-loan-early/
- https://www.latimes.com/compare-deals/credit-cards/guides/good-apr-for-credit-card
- https://www.nerdwallet.com/mortgages/mortgage-rates
- https://www.cnet.com/personal-finance/mortgages/advice/mortgage-rate-predictions-january-fed-meeting/
- https://www.53.com/content/fifth-third/en/financial-insights/personal/financial-education/pros-cons-of-rising-interest-rates.html
- https://credit.org/blog/what-does-interest-rate-really-mean/
- https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/business-review/1980/br80somf.pdf
- https://www.chase.com/personal/auto/education/financing/paying-off-car-loan-early
- https://www.livemint.com/money/personal-finance/5-banks-charge-lowest-interest-rates-on-personal-loans-credit-score-hdfc-bank-icici-bank-sbi-pnb-kotak-mahindra-11707217673601.html
- https://homework.study.com/explanation/is-everybody-worse-off-when-interest-rates-rise-explain.html
- https://www.marketwatch.com/guides/car-loans/auto-loan-interest-rates-by-credit-score/
- https://thehill.com/business/4404959-nearly-nine-in-10-us-homeowners-have-mortgage-rate-below-6-percent-report/
- https://www.bankrate.com/finance/credit-cards/how-to-lower-credit-card-interest-rate/
- https://www.investopedia.com/ask/answers/071715/how-do-changes-interest-rates-affect-spending-habits-economy.asp
- https://www.noradarealestate.com/blog/will-mortgage-rates-ever-be-3-percent-again/
- https://ycharts.com/indicators/us_real_interest_rate
- https://www.cnbc.com/select/good-interest-rates-for-personal-loans/
- https://www.investopedia.com/ask/answers/111414/does-inflation-favor-lenders-or-borrowers.asp
- https://money.usnews.com/loans/mortgages/mortgage-rate-forecast
- https://www.unbiased.co.uk/discover/tax-business/running-a-business/are-interest-rates-going-up
- https://www.consumerfinance.gov/ask-cfpb/will-paying-off-my-credit-card-balance-every-month-improve-my-score-en-1293/
- https://www.nerdwallet.com/article/loans/auto-loans/average-car-loan-interest-rates-by-credit-score
- https://www.cnbc.com/select/should-you-pay-your-credit-card-bill-early/
- https://www.lendingclub.com/resource-center/personal-loan/the-pros-and-cons-of-paying-off-a-personal-loan-early
- https://www.stlouisfed.org/education/making-personal-finance-decisions-curriculum-unit/three-cs-of-credit
- https://money.usnews.com/loans/rates/mortgages/30-year-mortgage
- https://www.volkswagenofdesmoines.com/finance/car-buying-tips/what-happens-to-interest-rates-if-you-have-bad-credit/
- https://lanterncredit.com/auto-loans/highest-car-interest-rate
- https://www.finder.com/mortgages/100000-mortgage
- https://www.way.com/blog/highest-apr-car-loan/
- https://www.nerdwallet.com/article/loans/personal-loans/safe-small-dollar-loans
- https://www.investopedia.com/insights/forces-behind-interest-rates/
- https://homebuyer.com/research/2024-mortgage-rates
- https://www.ramseysolutions.com/real-estate/how-fed-rates-affect-housing
- https://www.chicagobooth.edu/review/rate-hikes-are-costing-fed-treasury
- https://www.bankrate.com/mortgages/mortgage-interest-rates-forecast/
- https://www.bankrate.com/finance/credit-cards/what-to-do-after-card-apr-increase/
- https://fortune.com/2023/10/18/inflation-tax-made-1-middle-class-richer-nber-working-paper/
- https://time.com/personal-finance/article/what-happens-if-you-go-over-your-credit-card-limit/
- https://fortune.com/recommends/investing/safe-investments/
- https://www.chase.com/personal/investments/learning-and-insights/article/what-the-fed-raising-interest-rates-means-for-investors
- https://www.equifax.com/personal/education/credit-cards/articles/-/learn/should-i-pay-off-my-credit-card-in-full-each-month/
- https://www.bankrate.com/banking/federal-reserve/how-federal-reserve-impacts-your-money/
- https://www.helpwithmybank.gov/help-topics/personal-auto-loans/loan-interest-rates/loan-interest-residual.html
- https://www.cnbc.com/select/what-happens-when-you-miss-a-credit-card-payment/
- https://www.businessinsider.com/personal-finance/average-mortgage-interest-rate
- https://www.jdpower.com/cars/shopping-guides/what-kind-of-car-financing-rate-can-i-get-with-a-700-credit-score
- https://www.morganstanley.com/ideas/high-interest-rates-benefits-investing-opportunities
- https://www.cnbc.com/select/when-to-close-high-interest-rate-card/
- https://www.clevelandfed.org/center-for-inflation-research/inflation-101/why-should-you-care-technical
- https://www.investopedia.com/ask/answers/041015/how-do-interest-rate-changes-affect-profitability-banking-sector.asp
- https://www.consumerfinance.gov/ask-cfpb/my-payday-lender-said-my-loan-would-cost-15-percent-but-my-loan-documents-say-the-annual-percentage-rate-apr-is-almost-400-percent-what-is-an-apr-on-a-payday-loan-and-how-should-i-use-it-en-1625/
- https://www.morningstar.com/markets/when-will-fed-start-cutting-interest-rates
- https://nypost.com/credit-cards/how-to-avoid-credit-card-interest/
- https://www.cnbc.com/select/interest-rate-hike-pros-cons-how-to-benefit/
- https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-forecast/
- https://www.imf.org/en/Blogs/Articles/2023/10/16/new-look-at-global-banks-highlights-risks-from-higher-for-longer-interest-rates
- https://www.bankrate.com/rates/interest-rates/federal-funds-rate/
- https://www.bankrate.com/loans/personal-loans/tips-to-pay-off-personal-loans-early/
- https://www.thisismoney.co.uk/money/mortgageshome/article-11885727/When-rates-start-fall-Base-rate-forecasts.html
- https://www.lendingtree.com/home/mortgage/rates/mortgage-interest-rates-forecast/
- https://www.nerdwallet.com/article/investing/inflation
- https://www.nerdwallet.com/article/loans/personal-loans/average-personal-loan-rates
- https://www.investopedia.com/articles/investing/052814/these-sectors-benefit-rising-interest-rates.asp
- https://money.com/when-to-lock-in-a-mortgage-rate/
- https://www.bound.co/blog/how-do-interest-rates-affect-exchange-rates
- https://www.stlouisfed.org/on-the-economy/2023/feb/rising-rates-complicate-banks-investment-portfolios
- https://www.forbes.com/advisor/auto-loans/good-apr-for-car-loan/
- https://time.com/personal-finance/article/15-3-credit-card-hack/
- https://www.cnbc.com/select/interest-rates-rising-saving-more-appealing-debt-more-harmful/
- https://www.mpamag.com/us/mortgage-industry/guides/average-mortgage-rate-everything-you-need-to-know/433239
- https://www.usbank.com/investing/financial-perspectives/market-news/how-do-rising-interest-rates-affect-the-stock-market.html
- https://wallethub.com/edu/cc/what-is-a-good-apr-for-a-credit-card/42759
- https://www.usatoday.com/money/blueprint/banking/savings/7-percent-interest-savings-accounts/
- https://www.equifax.com/personal/education/credit/score/articles/-/learn/what-is-a-good-credit-score/
- https://www.cnbc.com/2023/09/05/mortgage-rate-tipping-point-homeowners-say-5percent-is-the-magic-number.html
- https://www.creditkarma.com/advice/i/what-affects-your-credit-scores
- https://www.rocketmortgage.com/learn/buydown-mortgage
- https://www.rocketmortgage.com/learn/when-to-get-a-mortgage-with-rising-rates
- https://www.bankrate.com/finance/credit-cards/does-credit-card-apr-matter/
- https://www.forbes.com/advisor/auto-loans/best-auto-loan-rates/
- https://www.chegg.com/homework-help/questions-and-answers/benefits-yields-interest-rates-low-prospective-lenders-borrowers-b-prospective-lenders-c-p-q123507058
- https://www.chase.com/personal/banking/education/basics/how-does-raising-interest-rates-help-inflation
- https://www.marketwatch.com/guides/car-loans/72-month-auto-loan-rates/
- https://www.equifax.com/personal/education/credit/score/articles/-/learn/why-credit-scores-may-drop-after-paying-off-debt/
- https://money.usnews.com/loans/mortgages/articles/historical-mortgage-rates
- https://www.bankrate.com/mortgages/mortgage-rates/
- https://www.brtelco.org/talking-cents-financial-insights/whats-a-good-apr-for-a-car-loan-find-out-now
- https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/
- https://www.creditkarma.com/auto/i/when-should-i-refinance-auto
- https://www.nerdwallet.com/article/credit-cards/what-is-a-good-apr-for-a-credit-card
- https://www.linkedin.com/pulse/impact-raising-interest-rates-marginalized-addressing-bill-wheeler
- https://www.lendingtree.com/home/refinance/how-soon-can-i-refinance-my-mortgage/
- https://www.nerdwallet.com/article/mortgages/15-or-30-year-mortgage-calculator
- https://www.businessinsider.com/personal-finance/7-percent-interest-savings-accounts
- https://www.plum.com.au/news-information/news-updates/how-interest-rate-rises-affect-you
- https://www.fool.com/the-ascent/personal-loans/what-is-good-interest-rate-personal-loan/
- https://www.investopedia.com/articles/investing/120715/10-ways-profit-interest-rate-increase.asp