topic Re: Credit Card Interest in Credit Cards

Credit Card Interest

Anonymous — Sun, 27 Jan 2013 07:32:09 GMT

How is credit card interest calculated?

Example:

$5,000 in purchases with no prior balance from the previous month

$2,000 in payments before the end of the cycle creating a $3000 statement balance

$2000 in payments creating a $1,000 carried balance

At 15% what would the interest charged be?

Would it be the monthly rate of 1.25% multiplied by the $1,000 carried balance? Interest charges around $12.50

Or would the bank waive any grace period and charge a 0.04% daily rate. Meaning whatever the balance is on any given day during the entire month and grace period gets charged interest? This would result in interest charges of over $50 for just one billing cycle.

Thoughts?

If we can't come up with a solution, I might have to try it for just one month to see what happens.

Re: Credit Card Interest

jsucool76 — Sun, 27 Jan 2013 07:42:21 GMT

Im not entirely sure myself, I've never been charged interest, but I think by law your lender must put a minimum payment warning on your statement. Something that says "if you pay only the min. payment, you will pay for x months, a total of $x.xx, and $x.xx in interest" might help you to figure it out.

Re: Credit Card Interest

firstladyd — Sun, 27 Jan 2013 07:44:11 GMT

I think they try to keep it confusing which is why I try to pay off asap.

Re: Credit Card Interest

shakalaka — Sun, 27 Jan 2013 14:07:17 GMT

AFAIK the grace period is waved if you did not PIF by the due date. So interest (for the remaining part) will happen from date of purchase. Normally it is calculated on a day to day base. You should check the terms of the card. It should be in there.

Re: Credit Card Interest

youngandcreditwrthy — Sun, 27 Jan 2013 14:52:59 GMT

I'm fairly certain you will pay interest on the "average daily balance" which is calculated daily.
So
If you paid $2000 on a $5000 balance, say...in the very middle of the month... You'd prob pay interest on the average daily balance of $3500(1/2 between $2k&5k). This is a wild guess btw.

I am saying this bc Barclay's recently charged me interest this way.

Re: Credit Card Interest

SnackTrader — Sun, 27 Jan 2013 15:17:54 GMT

Just as young said above, it is typically the average daily balance method, but there are other methods that can be used if the creditor discloses, I believe. So on all items past their grace period and cash advances immediately, the average balance at the end of the banking day (correct me if I'm wrong there) is recorded, and averaged at the end of the month and multiplied by the interest rate in a monthly fashion. It's a rather difficult calculation to make by yourself without the exact same information your lender is using.

There are detailed explanations of this within each card's disclosures.

Re: Credit Card Interest

Anonymous — Sun, 27 Jan 2013 16:19:32 GMT

@Anonymous wrote:
How is credit card interest calculated?

Example:
$5,000 in purchases with no prior balance from the previous month
$2,000 in payments before the end of the cycle creating a $3000 statement balance
$2000 in payments creating a $1,000 carried balance

At 15% what would the interest charged be?

Would it be the monthly rate of 1.25% multiplied by the $1,000 carried balance? Interest charges around $12.50

Or would the bank waive any grace period and charge a 0.04% daily rate. Meaning whatever the balance is on any given day during the entire month and grace period gets charged interest? This would result in interest charges of over $50 for just one billing cycle.

Thoughts?

If we can't come up with a solution, I might have to try it for just one month to see what happens.

SInce you did not PIF, there is no grace period. Interest is charged on the Average Daily Balance from date of first charge. Typically they use the Average Daily Balance times the Daily rate (!5%/3 65) times number of days in the statement cycle.

So your example can not be calculated without knowing dates of charges and payments. Your ADB could vary from $2000 to $4000 based on how quickly you charged and paid.

Re: Credit Card Interest

trumpet-205 — Sun, 27 Jan 2013 16:27:00 GMT

@shakalaka wrote:
AFAIK the grace period is waved if you did not PIF by the due date. So interest (for the remaining part) will happen from date of purchase. Normally it is calculated on a day to day base. You should check the terms of the card. It should be in there.

Two methods exist, one is based on original purchase amount (In OP scenario, it will be based on $5,000)

The other is average daily balace method.

Re: Credit Card Interest

Anonymous — Sun, 27 Jan 2013 16:33:42 GMT

@trumpet-205 wrote:
@shakalaka wrote:
AFAIK the grace period is waved if you did not PIF by the due date. So interest (for the remaining part) will happen from date of purchase. Normally it is calculated on a day to day base. You should check the terms of the card. It should be in there.
Two methods exist, one is based on original purchase amount (In OP scenario, it will be based on $5,000)

The other is average daily balace method.

I doubt any consumer CC would base it on $5000. Do you know of any who do.

Re: Credit Card Interest

Anonymous — Sun, 27 Jan 2013 16:49:07 GMT

By my calculations, it can vary from approximately $13 to $98 based on timing of charges and payments.

Re: Credit Card Interest

Anonymous — Sun, 27 Jan 2013 17:59:41 GMT

So now I trying to understand the extended process.

Let's say that the statement cycle is Jan 1 - Jan 31.

I charge $5,000 on Jan 1st and nothing else. My statement cuts Jan 31, and I have a payment due say Feb 21. I pay $1,000 then.

So the consensus seems to be that in this simple case I pay interest on the whole $5,000 for the 31 days of Jan. What happens in my Feb statement?

I assume I am charged interest on the $5,000 from Feb 1 to Feb 20, say, then again assuming no more transactions, my balance is $4,000 and for the remainder of Feb I pay interest on that?

Re: Credit Card Interest

jake619 — Sun, 27 Jan 2013 21:15:52 GMT

Maybe I misunderstand the question, but each of my card statements include a section titled something like "HOW WE CALCULATE YOUR BALANCE AND INTEREST CHARGES".

Re: Credit Card Interest

Anonymous — Sun, 27 Jan 2013 21:41:29 GMT

I have never paid interest, but I am just wondering how the bank calculates it. I can just PIF, but I an curious how they come up with the interest charges.

To be clear, this is the example:

$5000 charged, $2000 paid BEFORE statement cut, $2000 paid BEFORE due date, $1,000 carried. Assume linear charges and payments. No single big purchase and no single payment, just consistent charges and payments the whole time.

I might have to create a scenario like this and see what my bank charges me. I asked a banker, and he said in this example interest would only be charged on the $1000 balance, but I believe he is incorrect.

I think most credit cards use average daily balance.

I think this scenario would create an average daily balance of around $2,000. If the cycle is 31 days long with a 24 day grace period, then the billing period would be 55 days. At 15% the daily interest is 0.041%.

$2000*55*0.041%=$45.10

I would estimate the interest charge to be around $50 even though $1,000 is being carried.

To me that is ripping the customer off effectively charging a 60% APR on the $1000 carried.

Always PIF!