One of the first things you should learn is to calculate interest, because making only the minimum payments instead of the total of what you spent will only make your debt grow.
That was what happened to Elena, she thought she was in control of her credit cards, that she was able to manage it.
So if you are in a similar situation, pay attention to the following lines, as I will give you the formula to calculate the interests of your credit card.
How to calculate the interests of a credit card?
First go by notebook, account statement and calculator, please. Now, we are going to do a little review of concepts that you should know so that it will be easier for you to carry out the operations that we will do later.
The concepts you must master:
Average daily balance:
It is generated by dividing the balance of the period by the number of days from one cutoff date to another.
Days that make up the period:
Identify it in your statement, it is according to the month.
Balance at previous cut:
It is the debt you presented in your previous statement.
- Purchases and commissions: expenses that have been charged to your card.
- Payments and credits: it is the total money that you have deposited to the account for the reduction of your balance.
Ordinary monthly interest rate:
The interest that your bank charges you to make use of your card.
What are the interests of the period?
That is the percentage that the bank is charging you in addition to what you spend.
Value Added Tax
Charges that the bank makes in addition to the purchases you make. Check with your financial institution, as it varies between each one.
- Cash withdrawal.
- Collection expenses.
- Plastic replacement.
For more information, I recommend you read our article on how a credit card works.
Let’s start with the exercise
If you don’t remember what a statement looks like, I advise you to read our article on how to read a statement so that you keep it in mind before performing the exercise.
- Identify the cut-off date, in the example account statement it is October 26, which means that the period begins on October 27 and ends on November 27.
- It establishes the days that the period has, in the account statement it is displayed that they are 31 days.
- In the balance to the previous cut, we note that it is $ 1700.00. As of day 28, which is when a purchase is made, the daily amount will change. In this case a commission of $ 300.00 was charged for which:
$ 1700.00 + $ 300.00 = $ 2000.00
- From this moment the sum changes, we add the figure that we carry (the $ 1,700.00) and add $ 2000.00 from now on, until a new movement is made again, which in this example is 13 days of adding $ 2000.00 until the next purchase done. So:
$ 1700.00 + ($ 2000.00 * 13 days) = $ 27,700.00
- On November 10 a new charge is made for a purchase of $ 974.70, which we will add to the $ 2000.00 which is our daily balance, and the result is the amount that we will add until the next movement on the card arrives
$ 27,700.00 + ($ 2,974.70 * 14 days) = $ 69,345.80
- On November 24, a payment of $ 300.00 was made, this amount is subtracted from $ 2,974.70, and we add again, for the remaining days of the period, and we add the total we had so far to $ 66,035.80
$ 66,035.80 + ($ 2,674.70 * 3 days) = $ 74,059.90
- This result will be divided between the 31 days of the period, which will result in the average daily balance.
$ 74,059.90 / 31 = $ 2, 389.02
- Multiply the average daily balance by the ordinary interest rate, which in this case is 3%, which will result in ordinary interest.
$ 2,389.02 x 3% = $ 71.67
- Now, to ordinary interests, add the commissions (specified in your statement), in this example they are $ 300.00 and then multiply by 0.16 to obtain VAT (yes, it will also be charged).
($ 74.00 + $ 300.00) x 0.16 = $ 59.84
Tip to pay less interest: With these results we can verify that if we pay faster money to the card and do not wait at the end of the period, there are less interest to be generated.
Now, to all of the above add what you are charged for:
- Have cash
- Collection Expenses
- Plastic replacement
Do not forget that keeping your accounts up to date is of the utmost importance and having very well watched the calculation of interest on your card, ah! And never stop checking your payment date.
But, I’m already in debt up to my neck
Well, if you already have the debt problem on top, and you don’t know how to pay credit debts, like Rosa, there are options to get out of there.
Support from experts such as Good Finance, who will teach you how to pay credit card debts through constant guidance, paying less.
Customers who have made their sections on time, are given the possibility of acquiring a credit according to their ability to pay so that they begin to report positively on their credit history.