How to Calculate Revolving Credit Card Interest
There is no single method for calculating revolving credit card interest that applies to all credit cards. The basic formula is the same, but credit card companies use different approaches. Some are better for consumers than others. Your credit card may have a “grace period.” You won’t owe interest when you pay off your balance within the grace period.
Look on your credit card statement for your annual percentage rate or ask the credit card issuer. Divide the APR by 12 to find the monthly interest rate, called the periodic rate. For example, divide an APR of 15 percent by 12 and you get a monthly periodic rate of 1.25 percent. Multiply the periodic rate by the credit card balance. Suppose your balance is $800. Multiplied by 1.25 percent, this works out to a monthly interest charge of $10. Some credit card companies calculate interest based on a daily rate. To get the daily periodic rate, divide the APR by 365. Multiply a daily periodic rate by the balance and then by the number of days in the billing period to calculate the monthly interest charge.
Credit card issuers determine the balance on your account that is used to figure interest in different ways. Some companies take the ending balance for the month so you pay interest on all purchases made during the month. Others use the starting balance, which usually means you pay less interest because purchases made since the last billing date aren’t counted. Still other issuers take the average daily balance to compute interest charges.
Credit card compound interest calculator daily
Choosing a Credit Card: Credit card compound interest calculator daily
When choosing a credit card, it is important to consider what you'll be using the card for so you may select the one best suited to your needs. Some people will make a large purchase using a credit card and carry the balance through several months, paying off the debt as they earn money to pay for it. This can be a good fall-back in an emergency, but because of high interest-rates, you may wind up paying way more than the item cost originally. Other people choose to use credit cards in order to earn points, frequent flyer miles, or cash back. These incentive programs can be nice rewards and are worth taking a look at. Other people like to carry a credit card for travel, as they are often required to reserve a rental car or hotel room. Credit cards can be a useful way to build credit, and they also offer better consumer protection than debit cards if your information is stolen while shopping online. Finally, some people use a credit card because they prefer not to carry cash, and use it for their daily expenses.
Search for credit card offers and compare them based on what is important to you. If you will be carrying a balance from month-to-month, look for a card with the lowest interest rate or special offers of no-interest or low-interest for an introductory period. Just be careful to pay off the card before the period is up and watch out for annual fees. If you are using your card to earn points, miles, or cash-back, compare the offers and see what is most valuable to you. Some prefer cash-back as it is the most versatile, but if you fly often miles could be the way to go. Points can be good if you like free stuff, but be sure you want what the points exchange for before signing up. When using rewards cards, be careful to pay off your balance in full, because the high interest rates they carry will quickly negate the benefit of any rewards you might earn. If you use a credit card to build your credit score, put a monthly recurring bill, such as a phone or electric bill, on the card, then be sure to pay the card off each month. You won't pay any more than you did otherwise, but it will help you down the road when you apply for loans to buy a vehicle or home. Credit cards will protect you from fraud online because, unlike with debit cards, your money will not be affected if you are hacked. If you only carry a card for emergencies, look for a low interest rate and no annual fee. If you use a card instead of carrying cash, be aware that many small businesses will refuse credit cards for small purchases, so get to know the policies of the businesses you frequent.
Applying for a credit card is as simple as filling out some forms with your personal information. Once it is processed you will receive your card in the mail. Call the number to activate it and you are on your way to increasing your quality of life by using a credit card.
Compound Interest for Poor People
Please don't tell me that if I had $1,000 and invested it for 10 years at 10% interest I'd have a big pile of money. I don't have $1,000 and paying next month's bills is my biggest problem.
We've all seen articles on the wonders of compound interest. But most of us don't have large sums of money just lying around waiting to be invested wisely. So we're going to see how us 'poor folks' can apply compound interest to make a difference in our lives.
First, we do need to make sure everyone understands compound interest. Stated simply, it's when you earn interest today on the interest that you earned yesterday. Suppose you banked $1.00 yesterday and earned one cent interest. Today you'll be earning interest on $1.01. The interest that you earn on that one cent is called compound interest.
Unlike some financial deals, you don't need to be a wizard to use compound interest. There are a few simple rules that apply in all cases. If you apply them you'll improve your financial lot.
It's always better to compound more frequently. Daily compounding is better than monthly or quarterly. You'll begin earning interest on interest on the second day, not the second month. So you want to always choose the shortest compounding period offered to you.
More time magnifies the effects of compounding. Let's say you put some money away today at 5% interest. That money will double in about 14 years. If you left the interest in the account you'd have twice as much money earning interest in years 15 through 28. It's like you were getting 10% interest on your original savings. By year 29 you'll be earning 20% interest on your original savings! The rest of the account will earn less depending upon how long it's been in the account.
Time and compound interest, however, are a double edged sword. That 14% interest you're paying on your credit card debt is actually much higher if you figure in compound interest.
OK, now let's get down to how us poor folks can take advantage of compound interest. Could you find a way to save $5 per month? Maybe skip lunch at McDonalds or rent fewer movies each month. If you drive a lot you might save 2 gallons of gas by getting rid of the extra weight in the trunk of your car. Maybe send a couple of handwritten notes instead of greeting cards. If you look (and you really want to) you'll probably find some way to save that $5 each month.
"But, at that rate it'll take forever to save anything." Well, let's see. If we save $5 per month, earn 5% interest compounded monthly and continue to do that for 10 years what'll we save? Well, we'll have saved $600 (120 x 5). But the account will be worth $776. That's enough for a purchase or repair bill.
"You don't understand. I have credit card debts. I can't save money." Oh, but you're wrong, my plastic using friend! Let's suppose you take that $5 per month and add it to your credit card payment. You'll actually do better than the saver. Let's assume that your credit card interest rate is 14% annually. After ten years you'll have paid off an additional $1,315 in credit card balance.
Maybe you could do a little better. How about saving $5 per week? That's about $21.50 each month. You might be able to save that much by adjusting your thermostat by one degree. Take a brown bag lunch to work one day a week. One less dinner out each month. Drop a premium cable channel or two. Maybe a combination of smaller savings.
What would that do for you? Well, if you just put $5 a week away at 5% interest you'd have saved $2,600 over 10 years. But your account would be worth $3,371. That's a fair amount of money. A nice down payment for a car. Or you could remodel a bathroom. Or maybe you just want to spend the interest that will be earned on the $3,371 each year. You could spend about $168 every year forever and never touch your principal. Wouldn't it be nice to know you'll always have money for Christmas presents? Or to have a good start on your vacation each year?
Where can you earn 5% on your money? We don't make specific investment recommendations, but the stock market has averaged just about 10% over any given 10 year period in it's history. So you'll be able to find mutual funds that will be able to get that type of return for you.
Some mutual funds have a minimum initial purchase of $500 or $1,000. Until you reach that level, you can use a savings account or online bank.
But, maybe you're deeper in debt and just can't see your way out. You owe thousands of dollars on your credit cards. Short of Aunt Harriet leaving you an inheritance, those cards will never be paid off. Well, you could apply your $5 per week to those cards. At 14% interest you'd wipe out $5,633 in credit card debt in 10 years!
Would you like to
So now you have a choice to make. You can say that all that fancy compound interest stuff is just for the wealthy. Or you can recognize that the same principles work for smaller amounts. And begin to act on that knowledge. Would you give up two Big Burger meals each month to have $1,000 in ten years? Now that you know the facts, it's up to you.
updated April, 2013
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.
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How Credit Card Interest Works
Have you ever been shocked by your credit card bill? Via Shutterstock.
We’ve written a lot about the danger of overspending on credit cards. We’ve shared our struggles with credit card spending, tips to choose the best credit card, and even offered advice on how to know if your child is ready for a credit card. Overspending is a fast track to debt, especially when combined with high interest rates. While understanding interest is extremely important, we haven’t explained it completely…until now.
How credit card interest works
What’s Revolving Credit? While some cards (such as American Express) require you to pay off all of your charges every month, most credit cards offer revolving credit. Revolving credit is when a bank or credit card allows you to continuously borrow money up until a certain limit. Then, you can either choose to pay off the whole balance (the safest option!), put down a partial payment, or pay the minimum balance (worst option!). The revolving balance, the balance left after your payment, is then charged interest. Basically, the credit card bank is charging you for borrowing their money. How much will they charge you? This depends on the interest rate of the card and how high the balance is. Paying the card balance in full each month is the ONLY way to avoid interest charges.
Simple Rate Interest vs. Compound Interest – For most of us, simple interest is what comes to mind when we think of interest. Simple interest is the amount of money borrowed times the interest rate. For example, 10% interest on $1,000 is $100. This is NOT the type of interest credit cards use. Credit cards use the method of compound interest which can be thought of as interest on interest. Compound interest is interest paid on previously earned interest on top of the principal loan.
Compound Interest Simplified – Compound interest sounds complicated BUT it’s easier to understand than you might think. As an example let’s pretend you have a revolving balance of $1,000 on your card and your monthly interest rate is 18.99%. If your interest is compounded monthly you would be charged 1.5825% interest on that $1,000. In the first month alone you would have accrued an extra $15.825 in interest! It’s easy to see how this could quickly add up…especially if you only make the minimum payment.
Annual Percentage Rate – The annual percentage rate (APR) is the amount of interest you will be charged on an annual basis. So, if your credit card has an APR of 18.99% (like mine!) that’s how much you pay on the balance you carry each month. Seems simple enough, right? Well, it can be more complicated. Most credit cards compound interest daily or monthly NOT annually. This means that your interest rate may actually be higher than your APR. The two main methods that cards use to charge interest are daily balance and daily compounding.
- Average Daily Balance – When cards use this method you are charged interest once a month, based on your average balance. All of your daily balances are added up and then divided by the number of days in your billing cycle. Here comes the trick…then this number is multiplied by your MONTHLY interest rate which is 1/12 of your APR. For example, if your APR is 18.99% than your monthly interest rate is 1.5825 %. That’s the number that your daily balance will be multiplied by. So, if your daily balance was $100 your interest would be $1.58.
- Daily Compounding – Other cards compound interest daily. That means they charge you interest daily. Each day, your interest is charged on your balance and added to your total. The intrest would then be your APR divided by 365. For example, it would be .05202% if your APR was 18.99%. If you had $1000 balance at the end of one day the charge for that day would be around $0.52. That $0.52 is then added to your balance and interest is charged on the total amount ($1000.52) the next day.