Credit card interest is the main method through which a card issuer makes revenue. A card issuer is the bank which gives the consumer an account number and a card which can be used with different payees to make payments and at the same time, borrow cash from the bank. It is important for you to know how to calculate credit card interest, if you are using credit card because the bank will charge you the interest over the time on the money which remains borrowed.
Banks experience losses when cardholders do not return the borrowed cash as agreed before. As a result, optimal computation of interest depending upon any information the bank has about the cardholder’s credit risk is main point for the profitability of the card issuer.
Banks generally check national and international credit bureau reports to determine the borrowing history of the credit card applicant with other banks or ask for detailed documentation of the applicant’s money, before deciding what interest rate is to be offered.
The costs linked with credit card interest may disturb your budget as the cost of gas disturbs. Credit card interest is a mystery to many customers who do not know how the interest is computed. Once you have understood how credit card interest is calculated, you will be able to relate it to your budget and depending upon the budget, you will stop using it often as you did earlier. Here are some simple steps to calculate credit card interest.
Steps for calculation
- Search for your credit card statement for this month. Determine whether you had a balance in the last month. If the balance was zero then there will be no credit card interest on the purchases made by you this month.
- Determine what interest rate your bank is charging on your credit card per year. This interest rate should be written on your credit card statement. You can have 23.99 % or 16.5 % yearly interest.
- Find out the system your credit card issuer company uses for computing interest charges. Most credit card issuer companies try an average daily balance method in which interest accumulates daily.
- Find out your average daily balance for the month. Sum up the balance for every day of the month and then it should be divided by the number of days in the month. This will result in the average daily balance.
- Find out the amount of interest which is charged to you every day of the month. Take the early percentage rate of interest and it should be divided by 365 i.e. the no of days in a year. This will result in daily rate of interest or in periodic rate.
- Do the calculation of credit card interest. You should take the average daily balance and it should be multiplied by the periodic rate. After that multiply this result obtained by the number of days in the month that is 30 or 31 depending upon the month. You will now get the amount of the interest you have to pay for the month.
- Have a look at your credit card statement. Instead of trying to find out the average daily balance yourself, it is suggested to look at an amount which says ‘balances subject to finance charge’. This amount is said to be the average daily balance and put this amount only in the place of average daily balance in your calculation. Through the statement you should then pick the periodic rate. This will go in the place of the periodic rate in your calculation.
- Now you have to do some multiplication. To find out the finance charge with the help of the statement, you should take the balance subject to finance charge and multiply it by the periodic rate. Then this number should be multiplied by the number of days in the month that is 30 or 31 depending upon the month you have taken for calculation. Now you have obtained your monthly finance charge.
It is always necessary to know to calculate your credit card interest if you are using the credit card. I hope this article would have proved beneficial for you in learning how to calculate credit card interest.
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