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Understanding Purchase Interest Charges on Credit Cards

December 31, 2018 · 5 minute read

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Understanding Purchase Interest Charges on Credit Cards

With a swipe here and another swipe there, more Americans are relying each year on credit cards to cover their living expenses. In fact, credit card usage in 2015 was almost 6% higher than in 2013 , with American’s total credit card debt coming in at more than $1 trillion today.

Individually, households with credit card debt owe an average outstanding balance of more than $15,000 . Because most people owe more than they can pay off in a month, the average household ends up paying hundreds of dollars each year on credit card interest alone.

Credit card interest racks up when you don’t pay off your statement balance in full each month. This interest often shows up in the form of a “purchase interest charge” on your credit card bill.

Purchase interest charge is just a concise way banks refer to the interest you are paying on your purchases. You’re charged interest when your purchases are not paid in full by the end of the billing cycle in which those purchases were made. The purchase interest charge is based on your credit card’s interest rate and the total balance on that card—both of which can fluctuate.

Despite the fact that most of us have credit card debt, we really don’t like to talk about it. Instead of avoiding the subject, however, taking a closer look at your credit card balance and interest rate can help you figure out the best way to pay it off. Here’s some information about how purchase interest charges work, so you can be well-informed and create a plan to get rid of your credit card debt.

How Does Credit Card Interest Work?

Credit cards charge different interest fees on purchases, cash advances, and balance transfers. First and foremost, you can find your credit card interest rate in the terms the lender gave you on your most recent statement. Keep in mind that credit card interest rates can fluctuate from month to month.

If those papers are long gone, you can call your credit card company and ask what your annual percentage rate (APR) is. Credit cards break down interest rates into different transaction types, including purchases, cash advances, and balance transfers. If you purchase something and then don’t pay off the statement balance by the due date, you will pay interest on your purchases.

Some credit cards provide an interest-free period when you open them. But once that grace period lapses, it’s important to pay your balance in full if you want to avoid interest charges.

Let’s look at a simple example. Let’s say you get a new credit card with a $5,000 available credit line and a three-month interest-free period. You use the credit card to buy a new computer that costs $3,000 and a designer dog house for your poodle that costs $1,000.

For each of the three interest-free months, you pay the minimum balance due. But on month four, there is a new charge listed on your bill as a “purchase interest charge.” That is the interest you now owe because you did not pay off your credit card statement balance in full.

What is a Purchase Interest Charge?

Sometimes also known as a “finance charge,” a purchase interest charge is simply interest you pay on your credit card balance for purchases you made but didn’t pay in full. If you don’t pay off your balance each billing cycle, a purchase interest charge for the unpaid amount then becomes part of the total balance you owe.

For example, let’s say you owe $1,000 on a credit card, and because you did not pay that $1,000 in full you were charged a purchase interest charge of $90. You now owe $1,090, and then the next month’s purchase interest charge will be calculated based on a balance of $1,090.

Unfortunately, that’s how these interest charges can get you stuck in credit card debt. They just keep piling up if you’re not paying your balance in full every month.

How Do You Get Rid of a Purchase Interest Charge?

The only way to get rid of a purchase interest charge is to pay off your credit card in its entirety. Unfortunately, because the interest charges can stack up quickly, it can be hard to pay off your entire credit card in a single billing cycle. After all, it would be very hard for the average person to pay off more than $15,000 worth of credit card debt in a single month!

Of course, paying off your credit card debt is still doable. You can plan out a budget, and pay lump sums toward your credit card debt for as many months as it takes to wipe out your balance. A major drawback is, of course, that every month another purchase interest charge gets added to the mix.

Using a Personal Loan to Pay off Purchase Interest Charges

Fortunately, there are alternatives to help you avoid accruing purchase interest charges while you pay down your balance. For example, you can take out a personal loan to pay off your credit card debt, which can ideally set you up with a lower interest rate.

The first benefit: Personal loans can offer fixed terms. This means that if you make your payment each month, at the end of the loan duration you signed up for, it is all paid off. Credit cards have no set term, which means you could pay the minimum every month and still not see the finish line for months or even years.

Additionally, using a personal loan with a lower interest rate than your credit card means that your debt can potentially cost you less money in the long run. Hypothetically, if your personal loan has an interest rate of 5.5% and your credit card has an interest rate of 18%, you would pay less with a personal loan because you wouldn’t be paying as much in interest.

Using a personal loan can help you pay off your debt sooner and spare you from continuing to accumulate purchase interest charges on your credit card. Remember that not all personal loans are created equal—some come with origination or prepayment fees that may make consolidating your debt to a personal loan less worth it. SoFi offers low-rate personal loans without origination fees or prepayment penalties.

Learn more about how a personal loan from SoFi can help you get out of credit card debt.


The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.

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