How is APR is calculated on a credit card

Discuss anything related to interest rates & fees, like balance transfer offers, low rate cards, annual fees, etc.
5 posts
zimnyi
 
Posts: 2
Joined: Mon Feb 07, 2011 10:17 am
Location: LI

How is APR is calculated on a credit card

Postby zimnyi » Mon Feb 07, 2011 11:55 am

Ok, I have been all over the internet trying to get a simple answer but what I have found is that there is none. So here goes. I am going to give an example of how I understand it and would appreciate it greatly if someone would comment on it and see if I am right or where I am wrong with my calculations for interest charges. Thanks in advance for any comments.

Mike opens up a credit card account with the APR at 9.24%. His billing cycle runs from the 23rd to the 22nd of each month and the due date is on the 19th each month.

In his first billing cycle from June 23rd-July 22nd, Mike has charged $1,000 on his credit card which is due on August 19th. Mike pays 500 bucks.

In the next billing cycle from July 23-August 22, Mike charges $300.

Ok so here is how I see it and correct me if I am wrong. After the first cycle, Mike paid 500 bucks of the $1000 dollars he charged. The interest will be the APR of .0924/365 to find the daily periodic rate which is .0002531. That number is multiplied by the FULL 1000 dollars that he charged which equals .2531 and then times it by 31 days in a billing cycle which equals an interest charge of $7.85. This is how I understand it. Am I doing ok so far?

Now, next is where I am lost. Mike now has a balance of $507.85 before he charges the $300 in his next cycle. Is the 300 bucks that he subsequently charged still eligible for the 25 day grace period or is that 300 bucks now calculated into the $507.85? How I understand it is that yes, those 300 bucks have the grace period BUT the interest of the 507.85 balance now will compound daily interest at 25 cents a day until payment is posted to the credit card.

Someone please clarify using above example. Thank you.


zimnyi
 
Posts: 2
Joined: Mon Feb 07, 2011 10:17 am
Location: LI

Postby zimnyi » Mon Feb 07, 2011 3:38 pm

Ok. I just read a bunch of stuff on Average Daily balance and it threw my above example out of whack but surprisingly the numbers in the end are very similar. I guess now the question becomes about teh 300 bucks that Mike charged in the next month. Is that still subject to a grace period?

User avatar
Elliot Castro
Platinum Member
Platinum Member
 
Posts: 77
Joined: Sat Jan 22, 2011 4:23 am
Location: sfdsf

Postby Elliot Castro » Tue Feb 08, 2011 4:32 am

Ok, I have been all over the internet trying to get a simple answer but what I have found is that there is none.


Of course there is no simple answere. Different banks calculate your debt in different manners, in fact even the grace- period rule-set changes from one bank to the next. The best I can say, is re-read the very small print pamphlets which were issued with your card.

Ragovia
Green Member
Green Member
 
Posts: 5
Joined: Thu Feb 10, 2011 2:15 pm
Location: east coast

Postby Ragovia » Thu Feb 10, 2011 3:20 pm

The way I understand it is that there is never a grace period if a balance is being carried on a credit card.

User avatar
Mogul of Pineapples
Centurion Member
Centurion Member
 
Posts: 1271
Joined: Sun Jun 01, 2008 11:32 pm
Location: Smogland

Postby Mogul of Pineapples » Tue Feb 15, 2011 11:01 pm

zimnyi wrote:Ok so here is how I see it and correct me if I am wrong. After the first cycle, Mike paid 500 bucks of the $1000 dollars he charged. The interest will be the APR of .0924/365 to find the daily periodic rate which is .0002531. That number is multiplied by the FULL 1000 dollars that he charged which equals .2531 and then times it by 31 days in a billing cycle which equals an interest charge of $7.85. This is how I understand it. Am I doing ok so far?


As far as I know that's right.

Now, next is where I am lost. Mike now has a balance of $507.85 before he charges the $300 in his next cycle. Is the 300 bucks that he subsequently charged still eligible for the 25 day grace period or is that 300 bucks now calculated into the $507.85?


It is eligible for the grace period if the $300 is paid in full. The iffy part is that the law requires payments to be applied to higher interest balances first and that could mean the payment would first be applied to the $507.85 before the $300, I don't know how the APR is calculated in this situation. This is a stumper and I would have to think about it further because I don't want to give the wrong answer. Have you tried asking the credit card customer service dept? It would be amusing to hear them try and answer that.
Disclosure: I am a moderator/paid staff of this site, which does have advertising relationships with some credit cards that are discussed and linked to. Regardless, anything I say is my honest opinion.

Current Cards:
American Express: Blue Cash, Simply Cash Bank of America: WorldPoints Platinum Plus Chase: Amazon, British Airways, Cash Plus Rewards, Freedom, Ink Cash Citi: Thank You Premier, Dividend Platinum Select Discover: More
Primary Everyday Card: American Express Blue Cash
Primary Travel Card: Chase Sapphire Preferred



Return to “Finance Charges & APR Compare”

Who is online

Users browsing this forum: No registered users and 2 guests
cron