Credit Card Compound Interest

In banking, there are two kinds of interest: simple and compound.
Simple interest is, well, simple, and easily conceivable. Simple interest is basically the amount of money that is paid on a loan. This interest is calculated by multiplying the Principal (p) times the Rate (r) times the number of Time (t) periods. For example, if you loaned a friend $300 (p) for 1 month (t) and charged him 1% interest (r), she would owe you $303 at the end of the month. Compound interest is different and credit card compound interest is something that you should understand.

Credit card compound interest involves the practice of taking an interest charge in your previous balance and adding it to the balance of your newest credit card statement. This means that you pay interest on both the principal of your loan and your interest charges. This is how credit card compound interest works and this is what credit card companies do. To profit more from the arrangement, they use a daily accrual system. This means that credit card companies divide your annual rate by 365 (equal to the number of days per year). At the end of the day, your daily rate is multiplied by the balance of your loan in order to get the interest charge. The result of this computation is added to your daily credit card balance. For example, you have $2,500 on your credit card and an APR of 16.99%. Your daily rate is 16.99/365 = 0.0492876, or (0.000493%). When this is multiplied by $2,500, you have a $1.23 interest charge. So, the next day, your balance becomes $2,501.23. This is multiplied by your daily interest rate, ending with an interest charge of $1.23, which is added to the previous day’s balance for a total of $2,502.46. This may be very little considering the amount you see but when accumulated, you would have accrued somewhere between $60 and $70 in interest charges by the end of one month.

With credit card compound interest, the interest on the money you owe them becomes part of the principal, thus, also earning interest. This little trick is what makes credit card loans very difficult to settle since you pay more without actually being aware of it. This may seem like a rip off to consumers but this is reality in the banking and finance world.

Credit card compound interest is something to think about. So to prevent this from accumulating, avoid carrying over unpaid balance. This will eventually lead to a staggering amount of debt you’ll eventually need to pay back.


Source: Credit Cards For People With Bad Credit Rating

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