Credit 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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