Can someone explain some things about APR to me?

[jgrif08]

Lets say for example I have a $2500 credit card bill at 19% APR. At the end of the first month I make $300 payment. I'm assuming they apply interest charges to the amount after my payment, in this case $2200. Is that correct? Probably a really stupid question but I'm just wondering...

Also:

To figure out the percentage of interest charged monthly do I simply divide the APR by 12? If not, how do I figure that out?

One last thing:

Let's take the same card ($2500 balance, 19% APR) and say I want to pay exactly $300 a month on it. What is the equation to figure out how long it will take to pay that balance off? (Im sure there's some accountants out there...) Assume all payments are on time, no late fees, fixed APR, blah, blah, blah...

These are just some things no one has ever explained to me and I would really like to feel more educated about...

Thanks in advance,
J

[Lou]

your credit card will show you the daily interest. so if you pay $300 it wont go down exactly by the amount you pay. depending on how often you pay, say 29 days or 31 days it will adjust down, maybe 299 one month or 278 another, etc.

anytime i have a item i want to pay off, like your $2500, i simply say in my mind i want to pay if off in x amount of months and pay whatever amount it takes to pay it off without thinking about the interest. i find i pay things off faster that way

also, im sure if you "google" a credit card calculator you can run your math thru it, like you can visit mortgage101 to check mortgages..hope that helps

[jgrif08]

anytime i have a item i want to pay off, like your $2500, i simply say in my mind i want to pay if off in x amount of months and pay whatever amount it takes to pay it off without thinking about the interest. i find i pay things off faster that way



I'm totally with you there. Thing is if you're not 'thinking about interest' how do do know exactly what you need to pay in order to pay it off in x months?? I mean, you could pretty easily get in the right ballpark. I just want to know the math behind it.

I'll try a google search again. Wasn't able to find anything the other day but I don't really remember what search terms I was using.

[jgrif08]

Well I did find a handy calculator at bankrate.com so thanks for the tip!

However, I still would like to know what the equation is, just out of curiosity.

Also, I would like to know how the daily interest rate is calculated.

[dochesgriff]

Usually when calculating a daily rate you would take the rate and divide by 360, sometimes 365, but 360 is better for the card companies. All companies have different ways of calculating and that is why all of them are required to use APY in order to have a fair comparison. You probably need an amoritization table to find out your information.

[MoMoney4Me]

Your monthly finance charges shown on your credit card balance will fluctuate depending on the date your payment is recieved and the number of days in the billing cycle.

If you check the small print on your monthly statement you'll see your Daily Periodic Rate is 1/365th of the corresponding Annual Percentage Rate. In your case those would be .0520547 ( times 365= 19%)

At the end of the billing period the card company will compute your daily balances and periodic finance charge for each day of the billing period.

Your average daily balance is calculated by adding the balance on your account each day in the cycle and dividing that total by the number of days in the cycle.

Your total finance charge for the current statement will be calculated using the following formula: average daily balance x number of days in the billing cycle x daily periodic rate.

It may not be much, but your monthly finance charge is affected by how early you get your payment in and the length of that particular month.

Say if your payment is due on the 15th and your billing cycle ends on the 30th and you send a payment of $300. If you send your payment or do web bill pay so that your payment arrives the day after the cycle ends you'll benefit most by reducing your balance before daily finance charges hit your account. In other word your payment of $300 on the 1st would save you interest on that portion for 14 days.

About the only time it pays to hold back on your payment until the due date is if your rate of return on the money you're making your payment with is higher than the finance charge on the credit. In your case that's not likely. But say you had a zero interest auto loan and your checking account balance was earning a 5% APR it would pay to wait until the due date on the loan to make your payment rather than paying early in the billing cycle.


On your balance of $2500 @ 19% APR paying exactly $300 a month you'll take 10 months. Your total with interest would be a shade over $2702 + change. You could make a baloon payment your 9th month of about $303 instead of making a small payment of $3 the 10th month.

[jgrif08]

I remember learning about an amortization table in acct 101, but that was about 5 years ago...

I had no idea companies had to use APY, all I ever see advertised is APR. What would make APY more 'fair'?

I'll google amortization table and see if I can figure it out.

This post isn't based on a real situation at all. This is just something I've been wondering about for a while.

Thanks for the replies

[jgrif08]

Thanks a lot MoMoney!

That's exactly the kind of explanation I was looking for

[MoMoney4Me]

:D any time

Your card company can provide you a copy of your cardmember agreement. That will have the exact calcualtion as they pertain to your own account.

[MoMoney4Me]

Here's a good link that describes the distinction between APR and APY

http://www.investopedia.com/articles/basics/04/102904.asp

[jgrif08]

MoMoney, let me check if I'm getting this right:

According to my example above the interest charged would be $129.62, assuming there were exactly 30 days in the billing cycle and I paid on the last day of the cycle (which for arguments sake was the payment due date)

(2500 x 29) + 2200 = 74,700

74,700 / 30 = 2490

2490 x .0520547 = (roughly) $129.62

Is that correct given the above circumstances?

[MoMoney4Me]

You were right down to the last step.
The average daily balance 2490.00 X days in cycle 30 ( you left that one out) X daily periodic rate .0520547 = $38.88 current months finance charge

[MoMoney4Me]

Using the same formula, you'll see that if you'd paid on the first day of the cycle that finance charge would have only been $34.51, a savings to you of $4.37.
Hey I'd take it. That's a fast food lunch in the bag :lol:

[jgrif08]

You were right down to the last step.
The average daily balance 2490.00 X days in cycle 30 ( you left that one out) X daily periodic rate .0520547 = $38.88 current months finance charge

Can you double check that?

2490 x 30 x .0520547 def does not give me 38.88

I get 3,888.49. Why is my decimal point to places to the right of yours :confused:

[jgrif08]

I get it!

The daily rate of .0520547% when entered as a decimal number has to be entered .000520547.

Brain fart

God it feels good to learn things, not sure why more people aren't into that.

Thanks again Mo'

[MoMoney4Me]

Can you double check that?

2490 x 30 x .0520547 def does not give me 38.88

I get 3,888.49. Why is my decimal point to places to the right of yours :confused:

I get it!

The daily rate of .0520547% when entered as a decimal number has to be entered .000520547.

Brain fart

God it feels good to learn things, not sure why more people aren't into that.

Thanks again Mo'

I stand corrected. You are right on that one. The correct multiplier would be .000520547
Always keep that perspective in life, and there will be no limit to the things you will accomplish.