Card Interest Formula
A credit card interest formula varies depending on the type of interest applied to a credit card.
The most common, however, is compound interest. Compound interest in credit cards refers to the interest that is
charged on any unpaid principal plus interest. This can get expensive so cardholders are advised to understand this
to know how their credit card bills are computed. The credit card interest formula for compound interest calculates
the total cost of borrowing and is stated as: A = P(1 + r/q)nq where P is the principal, r is the APR in decimal
form, and q is the number of times a year it is compounded. Most credit card companies compound interest on a daily
basis and use the Average Daily Balance Method as a credit card interest formula. This method calculates the
interest on a day’s ending balance then adds this interest to the beginning balance of the following day.
For example, your credit card has an APR of 18%. At the beginning of the billing cycle, you accumulate an ending
balance of $200. Your average interest rate would be 18/365 which is 0.049315% (0.00049315 in decimal form). The
interest charge that you will get on the first day will be equal to $0.09863 or $0.10. This will make your
beginning balance on the second day $200.10. Let’s say you didn’t use your card for that day. Since the interest
rate is still accrued, you’ll end up with an ending balance of $200.20 for day 2. Then, you decided to use your
credit card on the third day of the billing cycle and charged $350 worth of purchases. This will make your ending
balance on the third day $550.20. At an interest rate of 0.049315% daily, you will pay an interest charge of
$0.27133 or $0.28. This credit card interest formula goes on until the end of the billing cycle, generating more
interest and leaving the cardholder with a significantly higher balance at the conclusion of the billing cycle.
The Average Daily Balance method is just one credit card interest formula that banks and card issuers use
to compute for interest. There are other interest computation techniques that are approved by the federal
government. It is your responsibility as a cardholder to compare all credit card interest formula calculation
methods that are offered by banks and credit card companies. By choosing one that you think suits your lifestyle,
you might end up with less to pay every month.
Source: Credit Cards For People With Bad Credit Rating
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