I Don't Understand How Interest Rates Work...?

[Anonymous]

Can someone explain please?  For example:

My credit card has a 16.99% APR and I have a $1,200 balance.  How much interest will I pay next month on that $1,200 balance?  I'm trying to figure out if it's better for me to enroll in a tuition payment plan (4 payments, $21 to enroll) or to just put the ~$1,200 on my credit card (16.99% rate) and pay it down in 4 months.

Thank you!

[pizzadude]

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@Anonymous wrote:

Can someone explain please?  For example:

My credit card has a 16.99% APR and I have a $1,200 balance.  How much interest will I pay next month on that $1,200 balance?  I'm trying to figure out if it's better for me to enroll in a tuition payment plan (4 payments, $21 to enroll) or to just put the ~$1,200 on my credit card (16.99% rate) and pay it down in 4 months.

Thank you!

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You would take the $1,200 and multiply it by .1699 ---> this gives you the total ANNUAL interest that you will pay, $203.88.

Next divide by 12 to get the monthly interest payment, which happens to be $16.99.

[nada9188]

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@pizzadude wrote:

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@Anonymous wrote:

Can someone explain please?  For example:

My credit card has a 16.99% APR and I have a $1,200 balance.  How much interest will I pay next month on that $1,200 balance?  I'm trying to figure out if it's better for me to enroll in a tuition payment plan (4 payments, $21 to enroll) or to just put the ~$1,200 on my credit card (16.99% rate) and pay it down in 4 months.

Thank you!

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You would take the $1,200 and multiply it by .1699 ---> this gives you the total ANNUAL interest that you will pay, $203.88.

Next divide by 12 to get the monthly interest payment, which happens to be $16.99.

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Don't forget residual 

[OhioCPA]

Assuming this is a cash advance, the interest for the first month will depend on when you take the cash out and when your statement cuts. If you take it out the day your statement cuts for the previous month then you will pay $16.99 for the first month. This assumes you don't make your first payment until after the statement cuts for the next period. Assuming you don't pay until the statement cuts for each of the four payments you will pay a total of around $40 in interest.

If this isn't a cash advance, you likely won't pay interest for the first month as normal credit card transactions don't incur interest during the first month. Interest will be due for the second and third month and possibly the fourth month depending on when it is paid. If you pay the fourth payment prior to the due date and you didn't incur interest during the first month your total interest will be close to the $21 tuition payment plan.  

[thrasher865]

I'm assuming the $21 to enroll is the entire finance charge.  If so, then do the payment plan.  4 months on the credit card would be $69.42, or if you make 4 equal payments over those 4 months, then ~$42.50

[OhioCPA]

The correct answer depends on if this is a cash advance or a normal credit card charge.

For the first month there is no interest for a credit card charge. Assuming the first of four equal payments of $305.30 is made on the statement date the balance incuring interest in the second month is $894.70. This will incur $12.67 in interest. Assuming the second payment is made on the statement date the balance incurring interest during the third month will be $602.07. This will incur $8.52 in interest. Assuming the third payment is made on the statement date and the fourth payment is paid by the due date for the third month there will be no interest incurred during the third month. Total interest is $21.20.

If this is a reward card earning 1% back, the net cost is $9.20. Which is better than the $21 finance charge.

[bribro]

It's always smart to compare interest rates, but as a general rule financing something via credit card should be your last option.

[Anonymous]

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@thrasher865 wrote:

I'm assuming the $21 to enroll is the entire finance charge.  If so, then do the payment plan.  4 months on the credit card would be $69.42, or if you make 4 equal payments over those 4 months, then ~$42.50

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Yes, the $21 is the entire charge.  

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@OhioCPA wrote:

The correct answer depends on if this is a cash advance or a normal credit card charge.

For the first month there is no interest for a credit card charge. Assuming the first of four equal payments of $305.30 is made on the statement date the balance incuring interest in the second month is $894.70. This will incur $12.67 in interest. Assuming the second payment is made on the statement date the balance incurring interest during the third month will be $602.07. This will incur $8.52 in interest. Assuming the third payment is made on the statement date and the fourth payment is paid by the due date for the third month there will be no interest incurred during the third month. Total interest is $21.20.

If this is a reward card earning 1% back, the net cost is $9.20. Which is better than the $21 finance charge.

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It's a normal credit charge on a 1% back card (Citi Platinum Select).  So I'll pay $21.20 in interest, but get $12 back from the total charge.  Thanks!

[OhioCPA]

The key is to make the first payment on or close to the statement date, then payment two and three on the subsequent statement dates. Thus, if you charge the tuition today and your statement cuts next week, then you should make the first payment next week.

[Tonya-E]

You would also need to consider the amount of days in the cycle. I use the same idea as pizzadude but including the amounts of days in the cycle. For example if there were 30 days I would use: .1) 1699/365 to get the daily interest rate. 2) Then take the resulting figure and multiply it by the amount of days in the cycle (30). 3) Then multiply that amount by the balance of $1200. For the information here I got: $16.76 using that method. It's about the same as the figure provided by pizzadude... **Edited to add: this assumes that you carried the $1200 balance the full statement cycle. So if you only carried it 25 days out of the 30 that makes a difference as well and you would change the figure in the second step accordingly**