Understanding How Your APR Is Calculated
Understanding your card’s APR and interest is crucial if you carry over balances from month to a other.
Did you ever wonder how the interest is calculated and why you can still pay sometimes interest even if you paid down your whole bill?
Let’s try to explain it a little.
To calculate your interest you will pay on your balances there are lot of ways and formulas how to do it, but the simple way will be as follows:
Let’s say your cards interest rate is 15.99%
1.Divide your APR by the number of days in the year. 0.1599 / 365 = a 0.00044 daily periodic rate
2. Multiply the daily periodic rate by your average daily balance. 0.00044 x $1,500 = $0.66
3. Multiply this number by the number of days (30) in your billing cycle. $0.66 x 30 = $19.80 interest charged for this billing cycle
This is quite simple still.
Next step is where it can get a little complicated, Lets assume you had a balance of $2000 carried over a few months and now one day you decide to pay it off fully with all interest, and even so on the next statement you still see a interest charge…
This is because of a term called residual interest, in basic terms its as follows: In real calculation of interest charged per day, then once your statement closes your bank can charge you interest every day, but all banks have a grace period till the due date and if you pay in full before the due date they will not charge you any interest.
But once you carried over a balance the banks will charge you every day interest so even if your above balance of $2000 is now after all interest fees $2500, and you pay it in full, but from the last bill till you paid it you still accumulated interest and that interest will only get calculated on the end of the cycle, so by the end of the next cycle the bank bank will charge you for the interest so you will still see a interest charge. Again as its a little complicated, your bill of $2500 from the last statement accumulated interest daily on it but the bank will not bill you for that only on the next closing date, so even you pay now in full that interest will come up on the next statement.
Its extremely important to check on this, as people think that finally they have paid down the balance in full after a few months carrying it over, and assume they do not need to look on the next statement as they paid already in full, but really he will still get s a bill of a few dollars for the interest and that needs to get paid.
Note: A lot of cards have a variable APR that changes based on your credit score. More on this in our next post…