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Frequent Contributor
CreditCard101
Posts: 401
Registered: ‎02-23-2009
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APR Finance Charge Questions

Hey guys and gals,

I have a questions about the finance charges from the Credit Card company. There are two method of calculating finance charge 1. by Monthly and 2. Daily Periodic

 

For the Daily method: An example of 20.99% APR (daily periodic rate is divided by 365 days in a year)

20.99/365 = 0.05751%

 

So for a balance of $500, how can they (the bank) make money when the finance rate is at 0.05751% ???

 

 

For the Monthly: An example of 20.99% APR (monthly rate divided by 12 months)

20.99/12 =1.749% or 0.01749

 

So for a balance of $500, they (the bank) earn $500*1.749% = $8.75

 

 

I dont see how the bank earn the interest based on the daily periodic rate from the example above with a $500 balance at 0.05751% (20.99%/365).

Can someone explains me how can the bank earn interest based on the daily periodic rate?

 

$500 x 0.05751% is NOT even closed to a $1 dollar interest ...

 

 

 

 

Moderator Emeritus
MarineVietVet
Posts: 14,084
Registered: ‎07-14-2009
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Re: APR Finance Charge Questions

[ Edited ]

CreditCard101 wrote:

Hey guys and gals,

I have a questions about the finance charges from the Credit Card company. There are two method of calculating finance charge 1. by Monthly and 2. Daily Periodic

 

For the Daily method: An example of 20.99% APR (daily periodic rate is divided by 365 days in a year)

20.99/365 = 0.05751%

 

So for a balance of $500, how can they (the bank) make money when the finance rate is at 0.05751% ???

 

 

For the Monthly: An example of 20.99% APR (monthly rate divided by 12 months)

20.99/12 =1.749% or 0.01749

 

So for a balance of $500, they (the bank) earn $500*1.749% = $8.75

 

 

I dont see how the bank earn the interest based on the daily periodic rate from the example above with a $500 balance at 0.05751% (20.99%/365).

Can someone explains me how can the bank earn interest based on the daily periodic rate?

 

$500 x 0.05751% is NOT even closed to a $1 dollar interest ...

 

 

 

 


These figures are calculated for balances being carried forward after any grace period. Of course if you always PIF none of this matters:smileyhappy:

 

Remember that interest accrues daily on any unpaid balances. If you start off a month with a $500 balance at the end of that first day you have accrued 0.28775 interest ($500X0.05751%). Add that 29 cents to the $500 and you get a new balance of $500.29 to begin day 2 of the cycle. At the end of day 2 your interest accrued is 0.28771 ($500.29X 0.05751%). Your new balance at the end of day 2 is $500.58 ($500.29+ 29 more cents). That's 60 cents interest in only two days. Without the daily accrual and figuring only 30 cents interest daily the rest of the month you're looking at about $8.40 for the remaining 28 days in an average month. So daily accrual brings the total even higher.

 

Those figures are just on a beginning balance of $500. You can see how high interest on a large balance can be a real killer. 0.05751% doesn't sound like alot until it compounds daily.

 

I think I've figured all this correctly. I'm sure someone will point out any mistakes. :smileyhappy:

Message Edited by marinevietvet on 12-17-2009 07:29 PM
Frequent Contributor
jausanka
Posts: 483
Registered: ‎05-06-2009
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Re: APR Finance Charge Questions


marinevietvet wrote:

CreditCard101 wrote:

Hey guys and gals,

I have a questions about the finance charges from the Credit Card company. There are two method of calculating finance charge 1. by Monthly and 2. Daily Periodic

 

For the Daily method: An example of 20.99% APR (daily periodic rate is divided by 365 days in a year)

20.99/365 = 0.05751%

 

So for a balance of $500, how can they (the bank) make money when the finance rate is at 0.05751% ???

 

 

For the Monthly: An example of 20.99% APR (monthly rate divided by 12 months)

20.99/12 =1.749% or 0.01749

 

So for a balance of $500, they (the bank) earn $500*1.749% = $8.75

 

 

I dont see how the bank earn the interest based on the daily periodic rate from the example above with a $500 balance at 0.05751% (20.99%/365).

Can someone explains me how can the bank earn interest based on the daily periodic rate?

 

$500 x 0.05751% is NOT even closed to a $1 dollar interest ...

 

 

 

 


These figures are calculated for balances being carried forward after any grace period. Of course if you always PIF none of this matters:smileyhappy:

 

Remember that interest accrues daily on any unpaid balances. If you start off a month with a $500 balance at the end of that first day you have accrued 0.28775 interest ($500X0.05751%). Add that 29 cents to the $500 and you get a new balance of $500.29 to begin day 2 of the cycle. At the end of day 2 your interest accrued is 0.28771 ($500.29X 0.05751%). Your new balance at the end of day 2 is $500.58 ($500.29+ 29 more cents). That's 60 cents interest in only two days. Without the daily accrual and figuring only 30 cents interest daily the rest of the month you're looking at about $8.40 for the remaining 28 days in an average month. So daily accrual brings the total even higher.

 

Those figures are just on a beginning balance of $500. You can see how high interest on a large balance can be a real killer. 0.05751% doesn't sound like alot until it compounds daily.

 

I think I've figured all this correctly. I'm sure someone will point out any mistakes. :smileyhappy:

Message Edited by marinevietvet on 12-17-2009 07:29 PM

Luckily for everyone, credit card companies do not charge interest compounded daily.  They use the "average daily balance" method most frequently, which takes your average balance for the total month and multiplies that by the daily interest rate, multiplied by the number of days in a billing cycle.
 
On your $500 balance and 20.99% APR, take the $500 as your average daily balance, ADB.  The calculation is = ADB * APR/365 (to get daily interest) * 30 (days in billing cycle, typically 28-32) = 500*0.2999/365*30 = $12.33 interest for the month, which is pretty huge relative to the small balance!
 

 

Frequent Contributor
CreditCard101
Posts: 401
Registered: ‎02-23-2009
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Re: APR Finance Charge Questions

Marinevietvet:

 

Thanks so much for clarifying. I got a much better insight now, but OMG for a 20.99% APR with a high balance is HELL RAISE INTEREST..

I can not afford to carry balance on this Citi CashReturns MC 20.99%APR.. This is so scary!!

 

This Citi CASHRETURNS MC will NOT earn a penny off me..Thank God I figure this out early before I do something stupid and carry a balance..

 

Frequent Contributor
jausanka
Posts: 483
Registered: ‎05-06-2009
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Re: APR Finance Charge Questions

<------ chopped liver :smileysad:
Established Contributor
voidman
Posts: 532
Registered: ‎06-07-2008
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Re: APR Finance Charge Questions

yes mostly it is avg daily balance and it is calculated in the following way.

 

balance on each day / (days in that month) 

 

If you pay $100 every week on $500 balance, you will end up paying less interest than paying $500 at the end of the month.  

-void
Frequent Contributor
CreditCard101
Posts: 401
Registered: ‎02-23-2009
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Re: APR Finance Charge Questions

Still 20.99% APR is high and also credit card company only allow you to pay ONCE per month and after the statement cut date..

Cant afford to carry balance nowadays!! Gotta watch my wallet and my spending!

Established Contributor
voidman
Posts: 532
Registered: ‎06-07-2008
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Re: APR Finance Charge Questions


CreditCard101 wrote:

Still 20.99% APR is high and also credit card company only allow you to pay ONCE per month and after the statement cut date..

Cant afford to carry balance nowadays!! Gotta watch my wallet and my spending!


yeah ofcource 20% is very high.

 

btw, once/month is CCC dependent I think. I pay chase multiple times per month. last week, i made 3 payments on the same day and all 3 was successful. 

-void
Moderator Emeritus
MarineVietVet
Posts: 14,084
Registered: ‎07-14-2009
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Re: APR Finance Charge Questions

[ Edited ]

jausanka wrote:



Luckily for everyone, credit card companies do not charge interest compounded daily.  They use the "average daily balance" method most frequently, which takes your average balance for the total month and multiplies that by the daily interest rate, multiplied by the number of days in a billing cycle.
 
On your $500 balance and 20.99% APR, take the $500 as your average daily balance, ADB.  The calculation is = ADB * APR/365 (to get daily interest) * 30 (days in billing cycle, typically 28-32) = 500*0.2999/365*30 = $12.33 interest for the month, which is pretty huge relative to the small balance!
 

 


 

This is from my BoA statement:

 

To calculate the daily balance for each day in this statement’s billing cycle, we take the beginning balance, add an amount equal to the applicable Daily Periodic rate multiplied by the previous day’s daily balance, add new Balance Transfers, new Cash Advances and Transaction Fees, and subtract applicable payments and credits If any daily balance is less than zero we treat it as zero,

 


They can call it "Average Daily Balance" or whatever they want but it sure sounds like the interest accrues daily to me.  Perhaps the use of the word "compounded" was unfortunate but I stand by my figures. I calculated just like BoA would.

 

 

Edited 12/18; Wait a sec. I never used the word "compounded".  I used accrued.  I need to read more closely. :smileyhappy:

 
Message Edited by marinevietvet on 12-18-2009 03:40 PM
Valued Contributor
Uborrow-Upay
Posts: 2,710
Registered: ‎10-16-2008
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Re: APR Finance Charge Questions


jausanka wrote:
<------ chopped liver :smileysad:

LOL  :smileyvery-happy:     (I don't know why, but that just hit me at the right time...cracked me up!)


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