Are you carrying a balance on your credit card? If so you are not alone.
According to a recent Gallup poll, almost half of all Americans carry a balance. With all the interest you pay on debt you carry from month to month, do you know how interest is calculated on your credit card? Most don’t know.
Here is how it works:
It all starts with your APR or Annual Percentage Rate.
This is number is expressed as a yearly rate, but the charges happen on a daily basis.
To find out your daily interest rate, divide the APR of your credit account by 365, which is the number of days in the year.
At the end of each day the credit card company multiplies your current balance by the daily rate to come up with the daily interest charge.
Then they add this amount to your balance which is called compounding.
Here is a quick example:
Let’s say you have a card with a 15% APR. Divide that by 365 and you get a daily rate of .041096.
If your balance is $1,000 for example, you multiply the balance by the daily rate and your interest would be $0.41 which is added to the principal.
This is what we call compounding, when you have to pay interest on your interest charges.
If this doesn’t sound fair to you, you’re not alone.