[MUSIC] More than half of Americans don't know when they start being charged interest on credit card purchases. And how exactly is the interest charged, and what does APR mean? In this lesson, you'll learn more about the interest rates on credit cards and what that means for your wallet. You'll also have a better understanding of how both interest charges and your payments are calculated. As well as have a greater appreciation for other types of fees that can come with credit card usage. You're likely familiar with the idea of paying interest when you borrow money, and credit cards of course are no exception. Credit cards do not charge any interest when you pay your balance off in full each month. So you don't have to worry about accruing interest unless you carry a balance from one month to the next. But let's talk about what happens when you do have to pay interest. When you apply for and are approved for a credit card, your interest rate will be disclosed to you as an APR, or an annual percentage rate. Since credit cards are revolving credit lines payment periods are monthly. So any balance you carry over from one month to the next is used to calculate interest. Since your APR is expressed as an annual percentage in order to calculate what you would accrue for a given month, you would need to first determine your daily periodic rate. And then multiply that by the number of days in that month. Sound a little confusing? Let's go through an example. Let's say you have a credit card with an 18% APR above the national average. Since credit card companies charge interest more frequently than annually, simply multiplying your balance by the annual percentage rate would not be an accurate way to determine what you would owe. Instead, you'll first need to calculate your dearly periodic rate which will be the same any day of the year. To get your daily periodic rate, you would divide your annual rate, in this case 18 by 365. So 0.18 divided by 365 = 0.00049. Next, you'll need to calculate your average daily balance. Credit card companies will assess interest based on your average daily balance. This means, if you carry over a balance from the previous month, you'll be paying interest based on the average of your balance for each day of that month. For simple math we'll assume you carried over a balance of $1,000 and did not make any additional charges. Since your average daily balance was $1,000, you would multiply that by your daily periodic rate. Remember that 0.00049 from earlier. The calculation would be $1,000 x 0.00049= $0.49. It doesn't seem like a big deal yet, right? Remember this is your daily interest rate and you receive and pay your bills monthly. So you'll need to multiply that $0.49 by the number of days in your billing cycle, which will vary. For this example, we'll use a 30 day billing cycle. So our next calculation would be to take our daily interest accrual of $0.49 times 30 days in the month equals $14.70. For the balance you carried over, you will be charged $14.70 this month. But wait there's more, most credit card companies compound interest daily. That means you pay interest on your interest accrued the previous day. So your average daily balance would actually be higher than $1,000, even though you didn't make any additional charges. It would be rather complicated for us to do the math here. The important thing to understand is that in all of these calculations we've done already, the actual interest accrued would be higher. And the higher your interest rate, the more significant that daily compounding would be. Hopefully what you've learned here is that credit card interest is something you should try to avoid whenever possible. And you'll never have to worry about calculating your interest due if you pay your card in full each month. When you are unable to pay your full balance however, you will be given the option to make a minimum payment. Typically your minimum monthly payment is a small percentage of your total balance when above a certain dollar amount. For example a minimum payment of $25 or 4% of your balance if that amount is higher than $25. Remember that if you only make your minimum payment, interest will begin to accrue and compound on your balance each day into the next billing cycle. By only paying the minimum amount until your balance is paid in full, you can be looking at repayment period that would take decades, with a total amount of interest paid being multiple times over your original charge. There is danger in only paying the minimum and you should see that disclose to you on your statement. If you have a credit card, take a look at your statement next month. You should see a minimum amount due and a calculation of how many years it would take you to pay off the balance, if you only pay the minimum as well as what you could expect to pay an interest, scary stuff. There are other fees you may encounter with credit cards even when you don't accrue interest, such as a late payment fee or an annual fee. Your credit card issuer will disclose these fees to you when you sign up for a card, and you should try to avoid any/or all fees when you can. Many credit cards will charge an annual fee if the card offers perks or benefits in return, like rewards points on frequent-flyer miles. For some cardholders, the annual fee might be worthwhile. But if you are considering a card with an annual fee, you want to make sure you do the math first to determine the value of what you'll get in return. If all you learn in return is more valuable than the annual fee each year, go ahead and get the card and try to avoid having any other cards with an annual fee. If the perks sound great, but you can't guarantee you'll get your money's worth out of it, find another card. There are plenty of options out there without annual fees. Credit cards can be very helpful for building your credit, protecting your accounts from fraud, and giving you the ability to spend in advance of having cash on hand. But there are potential costs too. I am supportive of responsible credit card usage for the reasons I just mentioned. And now that you understand how credit card fees and interest work, you can make the right choices to minimize or avoid these costs for the rest of your life. [MUSIC]