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Understanding Credit Card Interest

Updated on March 20, 2013

Many people have credit cards, but most probably don't understand all the charges associated with their plastic money. I recently started trying to get my finances in order, and got to learn all about interest rates. I'd like to share what I've learned with you because when I searched for help on the internet, I had a hard time finding an easy to understand explanation. I'm going to be using my current credit card debt information as the example.

My current balance is $266.11. The interest rate is 24.90%. It is a variable APR (annual percentage rate if you're a newbie like me). You absolutely need to know this if you own a credit card (or to be more accurate: you need to know this information if a credit card company owns you). You need to at least know how in debt you are even if you are oblivious to how detrimental it is. I was ignorant about my interest rate. When I joined mint.com, I said the interest rate for this card is 15%. I was guessing, but I was way wrong.

I know I'm supposed to pay it off in full every month, but if I could do that, I wouldn't have applied for the stupid thing in the first place. More power to those of you who do that, but it's not something that is feasible for me at the moment.

Now, you know the APR is 24.90%, but in order to find the monthly percentage rate, you need to divide by twelve. You do this because interest is accrued monthly, not yearly. So now we know my monthly percentage rage is 2.04%.

Next, you take your New Balance (or in my case, my overall balance since I haven't paid it off in a few months. I haven't made any new charges to have a new balance) and multiply it by your monthly percentage rate. 266.11 x .0204. You need to make that percentage rate a decimal so you need to divide 2.04 by 100 to get the .0204. The total for that is $5.43 in interest. That's how much you're paying for carrying that balance of $266.11. Per month if there were no new charges, late fees, or if you never made a payment. Because all of that is unlikely, you need to recalculate monthly.

Here's the formula I just explained above:

APR / 12 = MPR (monthly percentage rate)

MPR / 100 = your MPR in decimal form

Balance x MPR = Interest

I really hope that makes sense for those of you who need to know. You know who you are!!

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