residual interest This is a topic that many people are looking for. thetruthaboutdow.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, thetruthaboutdow.org would like to introduce to you How Credit Card Interest Works: The Math. Following along are instructions in the video below:
“Cards are one of those things that you might use every day. Without fully understanding. Understanding. The details of how they work particularly.
How your interest charge is calculated each. Now remember you don t owe any interest at all as long as you pay off your statement balance in full every month. And you can check out my other video for more information on that but if you can t afford to pay off the statement balance in full you ll be charged some amount of interest. But how much here s a depiction of a credit card billing cycle.
Let s suppose you start the billing cycle with seven hundred dollars on your credit card. I m going to go through an extra simplified calculation of how your interest is calculated. Suppose you keep 700 balance on your credit card. The whole month and never use it pull out your rates and fees table that you got with your credit card and find your apr write this down in this case.
This card. It was twenty three point nine nine percent. But that is your annual percentage rate..
If you re trying to calculate the interest you owe in one month. You can approximate it by taking your annual percentage rate and dividing it by twelve so it s about one point nine nine percent each month. So if i take my seven hundred dollars. Multiply it by the interest rate for that period one.
Month i get 1398 of interest. This is a rough estimate you have to go down to the daily level. Take your twenty three point nine nine percent apr divide. It by 365.
The number of days in the year this gives you your daily periodic interest rate in a month with 31 days my 700 balance time is my daily rate is 1426. Cents. This is slightly higher than the 1398. I got with my estimation method.
But that s because there s 31 days in this month in a month with only 30 days or 28 days. The interest owed would be even less remember you re paying interest for the privilege of holding that debt over time so if you hold that debt for 31 days. You owe a little bit more interest than if you only hold it for 30 days..
But let s take a more realistic example suppose i start with a 700 balance on my card. But then on day six. I make a 69 charge at the grocery store now my balance is higher 700 sixty nine dollars and forty five cents. Then maybe i fill up with gas on day twelve.
I go out to eat on day 17. I buy a gift for my wife on day 21. Now i m up at a balance of eight hundred and fifty two dollars later in the month. Maybe around this point is when my payment was due from the previous month.
So i ve made a payment of say three hundred dollars on day 26. This lowers my balance to only five hundred fifty two dollars in one penny. This is a much more realistic example of typical credit card usage. Now calculating your interest charge for this month comes down to the average daily balance let s look at my credit card agreement it says to get the average daily balance.
We take the beginning balance of your account each day and add any new transactions and fees and subtract any payments or credits. So for day one we take 700 day to seven hundred day three so on seven hundred dollars each day until day six. We take seven hundred and add any payments or credit..
So they add a credit of sixty nine dollars and forty five cents and so on so they calculate the balance every single day then we add up all the daily balances for the billing cycle. So i had five days at seven hundred dollars six days at seven hundred and sixty nine point four five and so on and divided by the number of days in the billing cycle. 31. So you ve got thirty one individual.
Daily balances divided by 31 gives you your average daily balance of seven hundred and thirty eight dollars and twenty four cents. What do we do with that value we figure the interest charge on your account by applying the periodic interest rate to the average daily balance of your account so the average daily bounce times the periodic interest rate so it s 31 days times that daily interest rate. We calculated earlier equals fifteen dollars and four cents that is your true exact interest charge for this month of credit card usage. Now this brings up some interesting points let s depict that average daily balance as this dotted line.
Here you know our true daily balance fluctuated throughout the course of the month. But our average daily balance is 738 dollars. What happens if you made some of those charges later in the month. Let s imagine pushing them out if you calculated it out you ve got many more days at seven hundred dollars instead of higher values.
So your average daily balance actually drops this means you ll pay less interest in this example month than the first one so it actually matters what day you make charges on your card here s another example physical goes back to our starting scenario. What if when we make the first charge. We pay it off instantly this drops down our average balance for the whole rest of the month..
Which significantly affects our average daily balance. Which is what the interest rate is based off let me show you again this is our starting example. But now we make a payment to the credit card shortly after making this charge. And this drops the average daily balance of the whole month significantly in other words when you make a charge on your card.
It starts affecting the amount of interest you owe that s very same day. Remember we d have no grace period here we ve started the month with a with a full balance. We ve carried a balance over if you don t understand what that means watch my other video linked in the description. Once you start carrying a balance.
You basically are charged interest. The moment. You make a transaction you go up and fill up your tank of gas. You start accruing interest that very day hopefully this video helps you understand the details of how credit card interest is calculated and charged now i cannot recommend enough to never pay a dime of interest in your life by always paying off your statement balance in full every single month.
Then you won t even have to worry about what your ” ..
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