A well-known saying among lawyers is, "He who pays wrong pays twice." When you compare this to credit cards, it makes the point even more clear. After a big shopping spree with your credit card, it's time to pay it back. But if the rates aren't figured out right, someone might pay the wrong amount.
Before you do any math, did you know that the interest charge and the interest rate are different, or rather, that they are the same? The percentage of the balance, or the interest rate, would determine how much interest would be charged.
If that doesn't make sense, let's use a small example to explain. If you have a balance of $1,000 and the interest rate is about 18%, you would pay $180 in interest for the whole year. Since the amount you owe changes from time to time, the interest you pay will also change.
There are a few ways to figure out how much interest to charge on a credit card. In the terms and conditions, credit card companies should explain how they figure out how much interest you owe. Even if the difference is small, it makes a difference to people who use credit cards.
How to Figure Out How Much Interest to Pay on a Credit Card
When comparing credit products, the annual percentage is the most important thing to look at. Since interest is calculated on a monthly basis, the annual percentage rate needs to be decomposed in order to figure out how much the credit card charges will be.
In different countries, there are different ways to figure out credit card fees. The USA Regulation lists the following as ways to do things:
Changed the balance
The interest charge is found by multiplying the balance at the end of the billing cycle by a factor. Since the time value given by the bank is not taken into account, the interest rate could be lower or higher.
Every day, on average,
Here, the balance for a certain period is found by dividing the sum of the daily outstanding balance by the number of days in the cycle. A constant factor is used to multiply the amount by itself to get the interest charge. Both of the resulting interest rates are the same as the daily interest rate. This method is the easiest of the four, and the interest rate it gives is very close to what was expected.
The average daily balance for two cycles
As its name suggests, it takes into account both the current billing cycle and the billing cycle before it and adds them together to get the balance.
It can be split into two more sub-groups: the balance with new purchases and the balance without new purchases. The first group is a double-whammy for regular credit card users because the method uses the average daily balances from the previous and current months. This means that the customer pays twice for the same activity. The second group, on the other hand, is not recommended for people who don't pay off their balances in full every month.
Previous Weigh
This method is best for the credit card company because the interest you pay each month is based on how much you owe at the beginning or end of the month. Like Adjusted Balance, this method could lead to an interest rate that is higher or lower than what was estimated. But the expected rate is charged on the part of the balance that has been carried for more than two full cycles.
Also, if your bill has a lot of charges you don't recognise, it's possible that someone has been using your number without your permission. This could be risky when figuring out how much interest you have to pay, and it will also cost you money.
