Let’s face it that credit card seems like two sides of a coin. On one side we know that having a credit card is very important. It is a tool to make easy transaction even in foreign land with different currency. Credit card gives us benefits as we no longer need to carry lots amount of cash money wherever we go. On the other side, we've heard a lot about bad stereotypes of credit card making lots of people fall into big debt problem. Off course it does not make credit card a definite big evil as it is also really useful. What we need is a thorough knowledge about how credit card works and for what it’s worth, understanding credit card interest is what really important.

Understanding Credit Card Interest

Every time we make a transaction using our credit card, we actually taking a loan from the credit card company and just like any other loan, certain rate of interest is charged. The annual percentage rate of APR of credit card here in this country are varied between 12.99% and 29.99% depends on various conditions. But calculating how much interest to pay is really not that simple. Credit card is known for its rather sophisticated, if it is not complicated, ways of calculating the interest rate and the amount of interest to pay. This is what makes many people don’t really understand about their credit card. It can be quite sophisticated but still, it is not a rocket science so many of us can learn about it. These are steps to determine credit card actual interest rate:

Calculating Monthly Interest

For example, on the first day of 30-day period you have credit balance of $1000 while on the 11th day you make a payment of $300. The first step is to calculate the average daily balance. Given the circumstances, on the day 11 to 30 or the next 20 days, you only have $700 balance. The average daily balance will be:

(10 x 1000) + (20 x 700) = 24,000 (for 30-day period). The average daily balance = 24,000 / 30 = 800

The next step is to calculate periodic interest rate from the APR divided by 365 (days per year). Let’s say you have 15% APR, then your periodic interest rate will be:

0.15 / 365 = 0.00041

The next step to do is to multiply the periodic interest rate with average daily balance and the result is multiply with the number of days period:

0.00041 x 800 = 0.328       0.328 x 30 = 9.84

You amount of monthly interest is $9.84.

Learning from the Equation

With that simple calculation you can understand how much the interest to pay on a given circumstances allowing you to determine payment strategy to give you more benefits and to help you pay off credit card debt without burdening you with lots amount of interest at long term of payment. It you think you are not good in calculation, you don’t need to worry. There are many credit card calculator applications online to help you get the number easily.

Actually there is a big lesson we can take from this calculation. It is supposed to give you a picture that the faster you pay the debt, the fewer amount of interest to pay. The policy of minimum monthly payment seems to give us benefits while otherwise it is a trap to keep us on the debt for longer period making us to keep paying the interest.
Credit Card Calculator

No comments:

Post a Comment

Thanks for reading my blog. Please give your comment

Related Posts Plugin for WordPress, Blogger...