Calculating Credit Card Interest

Calculating Credit Card Interest

Almost every American 18 an older has a credit card and some even younger. The first credit card ever issued was by Franklin National Bank back in 1951 and who would of thought that it would become such a staple in society? Now having a good credit rating is imperative to getting the most out of your money because everyone borrows. That's how the United States is built; Just look at the government budget.

Determining the credit card payment each month
Each month the credit card bill shows the minimum payment, the interest rate, days in billing cycle, the charges and the interest. These components are all you need to determine a particular months payment:

Take your beginning balance each day and add any new advances, charges and subtract any credits and payments. Then all of the daily balances in the billing cycle are divided by the total number of days in the billing cycle. This determines what is called the "Average Daily Balance." Then the finance charge is determined by multiplying the daily periodic rate (interest rate divided by 365) by the number of days in the billing cycle and then multiplied by the "Average Daily Balance." This determines the finance charge each month.

Let's take a sample first month's payment for a credit card with a 30 day billing cycle, assuming no purchases were made with an interest rate 5.75%.

The principal balance is $76,500.

30 (days in billing cycle)

76,500 x 30 = $2,295,000 -

2,295,000 / 30 = $76,500 (Average daily balance)

5.75% / 365 = 0.1575 (Daily periodic rate)

.01575 x 30 x $76,500 = $361.46

$361.46 is the financing added to the current balance: $76,500 + $361.46 = $76,861.46

It is difficult to determine the exact amount of the payment when many purchases are made through the month. Still you can get in the ball park.

The importance of paying down credit card balances
Knowing how credit card interest is calculated can make a big difference on how you pay it off. Rather than paying your credit card bill once a month, pay as early and often as you can every month. This way you'll reduce the average daily balance and thus the amount interest charged. If you are paying off larger amounts of debt, the difference can be huge as making the minimum payment will assure you years of billing cycles. So pay extra and pay often: For a credit card balance of $8,000 with 10% interest payment and with a $100 minimum payment, it would take a little over 43 years to pay it off. Not to mention the interest paid would be around $13,300. So you borrow $8,000 you pay $21,300.

Note, that many home equity loans and equity lines of credit determine interest in a similar fashion. So pay those cards off!