Learning how to calculate your interest is crucial if you want to stay out of financial trouble. When you look closely at your monthly credit card statement you may be shocked at the amount of finance charges listed.
You see, many consumers see that fee as the price of using credit and never fully understand what their purchases are costing them in real dollars. This is important if you are one who shops for the best deals or makes impulse buys when you find a good sale.
Understanding Annual Percentage Rate of interest and how that applies to each purchase on a daily and monthly basis can help you decide whether the item you want to buy will still be a good bargain if you charge it to a credit card.
This is not a problem if you pay off your credit card balances every month. All the financial experts tell you to charge only what you can pay for but in reality many consumers don’t have the financial resources to pay in full each time the bill arrives.
You may make a large purchase of appliances or furniture. You may charge everything while on vacation. If this is the case, your plan is to pay the bill over time to spread the cost over several months of income.
How to Calculate Your Rate Quickly
The easy way to calculate monthly or daily interest is to take the annual percentage interest charged times the balance of your debt. Divide that by 12 to arrive at a monthly finance charge. If you are paying off one or two large purchases over several months, this may be enough information for you.
However, almost all credit lenders now charge a variable rate of interest on credit card accounts. If you charged $3000 to your account last month when the APR was 18%, the finance charge will change if you interest rate is now 24% APR. The $500 the purchase would cost over a year now becomes more than $700.
If you have high credit card debt, fluctuating interest rates can be a big problem for you financially. High interest rates mean minimum payments on the account may be higher or it may you much longer to pay off the purchase than you planned.
How To Calculate Your Interest Rate Effectively
If your average daily balance on your credit card account changes frequently, there is a better way to calculate daily and monthly finance charges.
This is also a good way to make decisions on large purchases as you can estimate the actual cost of the item. If the cost of buying now at a sales price is more in the end than paying full price in cash later that is information that can help you financially.
On your credit statement, your lender will give you the average daily interest rate. Take that rate and multiply it by the price of the item you plan to buy and you’ll have a good idea of what the purchase will cost you.
If you make a $3000 purchase and plan to pay it off over three months, the cost will not be that much. However, if you plan to make minimum payments on the account each month, the result cost of the purchase can be significantly higher over the long term.
It is also helpful to calculate the daily interest on your average balance as a way to motivate you to pay off your debt quickly. If you know your balance is costing you $40 a month or $1.25 each day you may be more likely to find money in your budget that you can use to erase that credit card debt. You can also try to consolidate your cards as well.
Summary
Understanding the finance charges you pay daily, monthly and yearly for the privilege of using your credit card will help you make informed choices about purchases. It can also be helpful in motivating you to pay down your credit debt as quickly as possible.
