Credit card interest is one of those things that get a lot of us in trouble financially but yet most of us don't exactly know how it's working in 2022.
it's not super complicated but it is a little trickier than you might think.
I'll start by saying that you won't be paying any interest on your credit cards as long as you pay off your statement balance in full by the due date every month.
so if you do end up carrying a balance on your credit card this is how the interest works.
HOW CREDIT CARD INTEREST WORKS?
every credit card has an interest rate that's generally around twelve to twenty five percent in interest.
for these examples I'll just be using a card that's charging twenty percent in interest annually.
for the fun part so let's say that you didn't pay off your statement balance in full and you now have a balance of $1,000 on your credit card.
because you didn't pay off the statement balance in full now you've opened up the can of worms for your credit card.
to make this example really easy I'm just gonna start the billing cycle at the beginning of the month and we'll just have a few transactions to make the math really easy to understand How Credit Card Interest Works.
so follow me here on June 1st you owe $1,000 on your credit card on June 10th you spend $100 and on June 20th you spend $400 on your credit card.
most of us probably spend about every day but I'm just trying to make this easy to follow along.
on the last day of June on June 30th you spend another hundred dollars on that credit card.
so now your total amount for the statement balance is gonna be 1600 bucks.
credit card interest works on what's called the average daily balance method and this is how it works.
you're gonna take each day's total balance for that month and add them all together.
so follow me here day 1 through 9 was $1,000 each day the 10th through the 19th was $1100 a day the 20th through the 29th was 1,500 and then you had the very last day at $1,600.
add these all up and you'll get the number 34,000. now divide that by 30 because there's 30 days in June.
we've now got an average daily balance of eleven hundred and thirty three dollars.
now that we've got our average daily balance figured out we just need to figure out how much interest we're gonna be charged for that amount of money. That's How Credit Card Interest Works.
remember that we're just going to be using a 20 percent interest rate. whatever your actual interest rate is that's obviously the number you want to be plugging into this equation.
take that 20% and divide it by 365 the number of days in a year. we've now got the daily interest rate charge on our calculator.
just take that daily rate and times it by the 30 days looks like we've got a one point six two percent interest rate for that month.
finally take the one point six two percent interest rate and times it by your average daily balance.
there you go eighteen dollars and thirty five cents is what you're gonna be charged for that month and interest.
hopefully you followed along with this because that's the easiest way that I can explain credit card interest.
keep in mind that you'll literally pay less an interest if you can keep that average daily balance as low as possible.
pay down your credit card throughout the month to keep it as low as you can.
try making your big purchases at the end of the month. but really try to make it a goal to get that statement balance paid off in full every single month so that you never have to pay any interest on your credit cards.
So that is it for today, now you better understand 'How credit card interest works?'