How does interest work?

Do you know how much interest you pay on your credit cards every year? Credit cards are convenient, but every time you use them to make a purchase - and don’t pay it off in full and on time at the end of the billing cycle - you’re paying more than the purchase price. You’re also paying interest to your bank.

What is an interest rate?

An interest rate is either the cost of borrowing money or the reward for saving it. It’s calculated as a percentage of the amount borrowed or saved.

How do interest rates work?

When you don’t pay off your credit card balance in full, your bank applies your interest rate to the total unpaid portion of your balance. Following the terms you agreed to when you accepted your credit card, you’re required to pay at least the bank’s interest charges every month. 

Banks typically charge a higher interest rate on credit cards than other kinds of loans. Banks also charge higher rates to people they think are a higher risk. Banks determine your risk by reviewing your credit score. The higher your score, the lower the interest rate you’re likely to pay.

How is APR different from the interest rate?

Your credit card’s APR (or “annual percentage rate”) is different from its interest rate. Your card’s APR includes your bank’s interest rate plus their other fees and charges, many of which are charged only once or annually. With that in mind, weigh the difference like this: your interest rate tells you what you’re charged each month. Your APR includes all of the costs over the life of your loan or credit card.

What is an 0% APR credit card?

‍Many credit card issuers promote 0% APR cards to attract new customers. These “introductory” offers typically last between 6 months and 21 months, and they’re often promoted to encourage a balance transfer, where you transfer your balance from a card or a loan with a higher interest rate to a 0% APR card. Balance transfers usually require an extra fee (commonly 3- 5%), but with 0% APR over the introductory period, you have more time and flexibility to pay off your debt. 

How can I lower monthly interest charges?

The easiest way to lower your interest charges is to avoid them in the first place: pay your credit card bills in full and on time every month. If you need help managing payments, use a debt management tool like Bright

Once you’re connected to Bright, we look at all your debt and target the ones charging you the most interest. Bright also looks at your spending habits, determining how much you can afford to pay and making payments that save you the most. Month after month, Bright makes your payments for you, so you’re avoiding late fees - and always paying down your balance, lower the interest you pay. 

How can personal loans lower interest charges?

Some people use a personal loan to pay off their credit cards. If you can secure a personal loan with an APR lower than your credit cards, it can be an effective strategy, lowering the interest you pay as well as streamlining your payments every month. 

How can Bright help?

Bright offers personal loans to all qualified users. We can guide you through the process and set up new payments, saving you interest charges and other costs automatically. 

Your personal Bright Plan also offers low-interest debt transfer cards and, month by month, help you pay less in interest fees on your credit cards, automatically.