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How to calculate interest rate on credit cards
August 10, 2019
2:54 am
Canadianbull
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Is below formula correct?

If Interest rate = 1.99% for 9 months.
Principal $ = 7000

I = 7000 × 0.0199 × 0.75 = $ 104.475
I = $ 104.48 after 9 months
I = $ 11.61 each month

CB

August 10, 2019
5:39 am
Bill
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Doubt it's that simplistic. And I'm pretty sure they don't wait until you pay (9 months in your example) and then calculate interest retroactively. Plus I think you're required to pay off a bit of principal regularly, so I don't see your $7000 balance staying the same over 9 months, unless you happened to have new charges every month exactly equal to your minimum monthly payment. Plus I'd imagine there would be monthly compounding for the interest calculation. And the annual rate in your example is unrealistically low, seems to me. But I've never paid credit card interest so I don't really know. I imagine the small print on each card tells you exactly how interest is calculated for that card.

August 10, 2019
7:15 am
Doug
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Canadianbull said
Is below formula correct?

If Interest rate = 1.99% for 9 months.
Principal $ = 7000

I = 7000 × 0.0199 × 0.75 = $ 104.475
I = $ 104.48 after 9 months
I = $ 11.61 each month

CB  

It's calculated on your daily closing balance, for the amount outstanding as of the first statement date on which it appeared. It's very difficult to calculate exactly, much more difficult than calculating daily interest on a savings account or a GIC.

Also adding to the problem is that the credit card issuers apply payments to certain portions of your balance in a very specific sequence, which they do disclose in broad terms, but practically speaking, very difficult to calculate.

Certainly much simpler to calculate LOC interest than credit card interest!

Idea: require federally-regulated financial institutions to invest in technology to produce free calculator tools that allows one to input, or import, their credit card transaction data including dates and amounts and then produce a transparent calculation of the interest that takes into account statement dates and payments made. Bill, as a bank shareholder, will probably not agree with this dipping into the shareholders' net income (i.e., dividends), but as a fellow bank shareholder, I'd welcome this move. Banks can afford it. Their payout ratios are still reasonable.

Cheers,
Doug

August 10, 2019
10:05 am
Norman1
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There are at least three variations that I know of. One needs to review the cardholder agreement to see what the exact method is for the particular card.

The Home Trust Preferred VISA will calculate interest daily from the posting date of each purchase when one does not pay off the balance each month.

Another card calculates interest daily from the transaction date of each purchase instead of from the posting date!

Some former department store cards subtracted the payment, if the payment is above a given threshold, before calculating the interest for the statement period, as if the payment were made on the first day of the period.

August 10, 2019
12:59 pm
Bill
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I have absolutely no problem with free calculator tools that produce transparent calculation of interest, probably a great idea for some fi's to enhance their goodwill. Not so sure about it being mandatory, I believe adults can respond successfully to being responsible for their own interest debt calculations. I'm not a nanny-state guy that believes some other grown-ups should be employed to point out the interest impacts of my debts.

August 10, 2019
10:46 pm
Canadianbull
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Thank you all for your input.
sf-wink
CB

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