How To Calculate Credit Card Interest & Payments

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Credit cards can both be very convenient and an outright hassle.  It is convenient since you don't need to have wads of cash tucked away in your wallet in order to purchase stuff.  On the other hand, with this easy line of credit, it is virtually easy to crash and burn into a pile of debt if you are not careful with your spending.  Now, when the credit card company starts billing you, it would be beneficial for you to know how much you should pay them especially if you can't pay all your purchases within any given month.  Hence, knowing the interest charges as well as the minimum payment needed in order to avoid penalties and late fees will significantly help you manage your debt in relation to your monthly income.  Here are some tips to help you compute your credit card's interest charges and minimum payments.

  • The average daily balance.  This is the method that most, if not all, credit card companies utilize in charging interest to the card holder.  To get your average daily balance, you will need to take a look at your latest credit card statement and listing down all the balances on each day.  Add them all up and divide it by the total number of days of the billing period which is 30 by default.  For instance, say you currently owe the credit card company $1,500 and you make payment of $750 before the 15th of the month.  This will reduce your existing balance to $750.  For the rest of the billing period, your new balance is $750.  To calculate your average daily balance, use this formula: [15X$1,500] + [15X$750].  The result of this equation should be divided by the total number of days of the billing period which is 30 to get your average daily balance.  Hence, your average daily balance will be $1,125.
  • The interest charges.  If your purchases are on a deferred payment schedule, the credit card company will charge you a monthly interest charge.  To find the accurate rate they will charge you, you will have to look at your credit card statement and determine your APR or annual percentage rate.  If your APR is at 12 percent, then to get your credit card interest payment or charge, you will want to divide it by the total number of months in the given year.  So, 12 percent divided by 12 months will leave you with a monthly interest rate of 1 percent.  Hence, if your interest rate is 1 percent and your average daily balance is $750, then the credit card company will charge you $75.00 in interest for that particular month.  The rate will vary on the next month depending on the payments you make. 
  • The daily interest rate.  Believe it or not, some credit card companies will use a daily interest rate charging method.  When this happens, you can calculate your daily interest by dividing your APR with the total amount of days within the year.  The result you get will then be multiplied to the number of days you will be charged this daily rate.  Consider this a prorated payment scheme for card holders that pay off their balances in full before the billing cut off of the month.

These are the basics on how to figure out the method and processes that the credit card uses in charging each cardholder.  Bear in mind that the interest rate will vary depending on the purchase habit of the cardholder.  In any case, make sure to take good care of your credit if you don't want to pay outrageous interest payments later on.


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