How is interest applied?

[Anonymous]

I apologize for such a basic question but I have searched all over and asked a few people for an accurate answer on this but only seem to keep getting conflicting answers. I am very new to credit cards and how they really work since the beginning of June of this year.

I currently have 4 cards but only 2 have balances. I have been good about using the card and paying the balance in full before the due date. However, I hit a little road block and ended up having to use the 2 cards to get through it and now I am carrying balances I do not want. And the interest rate is what is scarying me. When I went to look at my credit statement for my one card this morning though it is saying I was charged only $2.31 in interest when I thought it would be around $28. I am confused.

Card I checked this morning is

PSECU Rewards card

limit of $1,500

Owed $307

Cashed out $11 in Rewards, Paid $100.

Interest rate is 14.40%

Was only charged $2.31 in interest.

2nd card with balance is

Amazon Rewards card

Limit of $1,800

Owe $414

Paid nothing yet. Due 10/4, (Sadly I do not get paid until 10/5, I cashed out on some vacation pay at work to beef that paycheck up. Minimum Payment is $25, I plan to put down at least $50 on 10/4, Paying at least $150 on 10/5)

Interest rate is 23.99

From my understanding, which I am pretty sure I don't understand this, if I do not pay my balance in full by 10/4, I will be hit with about $99 in interest. 

But from looking at my PSECU card I should have be charged $28.22, instead I was charged $2.31.

[K-in-Boston]

Interest on credit cards is typically applied at a daily rate.  The interest rates you are showing are APRs, which is the annual percentage rate.  To ballpark it, you can divide the interest by 12 to figure out approximately how much would be applied to your balance in one month (since the length of the months differ and your balance would presumably not have been exactly the same every day of the month due to payments and/or new charges).

For the PSECU balance of $307, multiply that by .1440 then divide that by 12 to get the estimated amount of interest: (307*.144)/12=$3.68 - again your balance may not have accrued interest every day of the statement period, or have been the same.

For Amazon balance of $414, (414*.2399)/12=$8.28

Just keep in mind that any new charges you make on those cards will have no grace period and begin to accrue interest immediately since you did not pay your entire statement balance in full prior to the due date.  Also, once you have paid the cards to $0, even with no new charges you should watch the following statement for trailing interest charges (the time between your statement closing and payment in full being made).

Hope that clears it up!

[Anonymous]

Ok I gotta hijack this one...Sorry....

So Let's assume I have a card that has a balance of 6035.23 and the Apr is 17.74%
(6035.23×.1774/12=$89.22)...... Is the $89.22 the minimum payment?

[RobertEG]

Most credit card agreements set interest calculation for accounts that have balances as being based on the average daily balance over the month.

That is determined by adding up the balances each day and dividing by the number of days in the month.

Daily balances fluctuate based on adding new charges made on a given date, and subtracting payments made as of their date to get a daily balance.

The monthly interest is then calculated by multiplying the average daily balance by the daily interest rate.

Daily interest rate is the APR divided by the 364.

A close estimate can be made by using the monthly interest rate, which is the yearly APR divided by 12.  However, that does not provide the exact interest, as it does not account for differing months having different number of days.

[CreditInspired]

The $89.22 is the amount of that month’s interest.

So, for example, if your minimum payment is $125, the $89.22 of that is interest.

[Anonymous]

So then do you take the $89.22 and add it to their regular minimum payment before interest started, to figure what you will be paying?

[CreditInspired]

In this example, suppose your minimum payment is $125, the lender will apply $89.22 to interest first and then the remainder ($35.78) to your principal. So, then your new outstanding balance would be $5999.45.

Hope this helps.

[ScoreSizzle]

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@K-in-Boston wrote:

Interest on credit cards is typically applied at a daily rate.  The interest rates you are showing are APRs, which is the annual percentage rate.  To ballpark it, you can divide the interest by 12 to figure out approximately how much would be applied to your balance in one month (since the length of the months differ and your balance would presumably not have been exactly the same every day of the month due to payments and/or new charges).

For the PSECU balance of $307, multiply that by .1440 then divide that by 12 to get the estimated amount of interest: (307*.144)/12=$3.68 - again your balance may not have accrued interest every day of the statement period, or have been the same.

For Amazon balance of $414, (414*.2399)/12=$8.28

Just keep in mind that any new charges you make on those cards will have no grace period and begin to accrue interest immediately since you did not pay your entire statement balance in full prior to the due date.  Also, once you have paid the cards to $0, even with no new charges you should watch the following statement for trailing interest charges (the time between your statement closing and payment in full being made).

Hope that clears it up!

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Great breakdown, thank you!