Almost every American 18 an older has a credit card and some
even younger. The first credit card ever issued was by Franklin
National Bank back in 1951 and who would of thought that it
would become such a staple in society? Now having a good credit
rating is imperative to getting the most out of your money
because everyone borrows. That's how the United States is built;
Just look at the government budget.
Determining the credit card payment each month Each month the
credit card bill shows the minimum payment, the interest rate,
days in billing cycle, the charges and the interest. These
components are all you need to determine a particular months
payment:
Take your beginning balance each day and add any new advances,
charges and subtract any credits and payments. Then all of the
daily balances in the billing cycle are divided by the total
number of days in the billing cycle. This determines what is
called the "Average Daily Balance." Then the finance charge is
determined by multiplying the daily periodic rate (interest rate
divided by 365) by the number of days in the billing cycle and
then multiplied by the "Average Daily Balance." This determines
the finance charge each month.
Let's take a sample first month's payment for a credit card with
a 30 day billing cycle, assuming no purchases were made with an
interest rate 5.75%.
The principal balance is $76,500.
30 (days in billing cycle)
76,500 x 30 = $2,295,000 -
2,295,000 / 30 = $76,500 (Average daily balance)
5.75% / 365 = 0.1575 (Daily periodic rate)
.01575 x 30 x $76,500 = $361.46
$361.46 is the financing added to the current balance: $76,500 +
$361.46 = $76,861.46
It is difficult to determine the exact amount of the payment
when many purchases are made through the month. Still you can
get in the ball park.
The importance of paying down credit card balances Knowing how
credit card interest is calculated can make a big difference on
how you pay it off. Rather than paying your credit card bill
once a month, pay as early and often as you can every month.
This way you'll reduce the average daily balance and thus the
amount interest charged. If you are paying off larger amounts of
debt, the difference can be huge as making the minimum payment
will assure you years of billing cycles. So pay extra and pay
often: For a credit card balance of $8,000 with 10% interest
payment and with a $100 minimum payment, it would take a little
over 43 years to pay it off. Not to mention the interest paid
would be around $13,300. So you borrow $8,000 you pay $21,300.
Note, that many home equity loans and equity lines of credit
determine interest in a similar fashion. So pay those cards off!
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