How To Calculate APR Credit Card Payments
Being able to make purchases with a credit card and then pay off the balance at a future date is a wonderful convenience. A great deal may only be available for a limited time and a credit card can allow you to pay for merchandise today and then pay the loan off for a nominal fee called a finance charge. Understanding how an Annual Percentage Rate, or APR, is calculated will determine if that loan you used was worth it or not.
The APR and how it is calculated is located on the back of the credit card statement along with other fees and conditions. Along side the APR is whether or not it is a monthly or daily interest rate. By knowing what the APR is and how it is calculated a finance charge can be determined.
The monthly periodic rate is calculated by taking the APR and dividing it by 12, the number of months in the year. If the APR is 18% then the monthly periodic interest rate will be 1.5%. The monthly finance charge can then be calculated by multiplying the outstanding balance of $1,000 by .015 (1.5% divided by 100) which will show that the monthly finance charge is $15.
The daily periodic rate is has an additional step because we will get the daily rate first and then the monthly rate from that number. An APR of 18% is divided by 365, the number of days in the year, which will return .05% per day. Finance charges for the month are then calculated by multiplying the daily interest rate by the number of days in the billing cycle times the balance. So take .05 times 31 which returns 1.55% times the $1,000 balance. The finance charge is slightly higher at $15.50 because of the daily APR.
The daily periodic rate is the most widely used for credit cards because it often results in higher monthly finance charges. It is therefore important to fully understand how an APR is calculated because on larger outstanding balances the resulting finance charges could wind up being significantly higher costing you more money. Finance charges are added to the principle balance if not paid in full every month so they can add up over time if you are not careful. When shopping for a credit card make sure to check how the APR is calculated as well as other fees to pick the credit card which helps you obtain you financial goals.
