How To Calculate Monthly Credit Card Interest Explained - How To Calculate The Average Daily Balance
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How To Calculate Monthly Credit Card Interest Explained - How To Calculate The Average Daily Balance |
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This Video Uploaded At 24-08-2022 00:14:10 |
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In this video we discuss how to calculate monthly credit card interest. We go through a detailed example of how to calculate the average daily balance and the actual monthly interest calculation.
Transcript/notes
The formula to calculate monthly credit card interest is monthly interest equals, the average daily balance, times the number of days in the billing cycle, times the quantity, the annual percentage rate divided by 365.
In this formula, the average daily balance is based on the balance for each day of that month’s cycle, so, this has to be calculated.
So, the calculation for the average daily balance looks like this, day 1 balance plus day 2 balance plus day 3 balance, and so on till the last day of the cycle. Say there were 30 days in the cycle, this would be day 1 balance through day 30 balance. Next, you add these up and divide by the number of days in the cycle, and that result would be the average daily balance.
Back to the formula, the number of days in the billing cycle is the same number that we just used to calculate the average daily balance.
And the last part of the formula, the annual percentage rate divided by 365, is the annual percentage rate of the credit card divided by 365. This is basically converting the annual rate to a daily rate, as credit cards compound interest daily.
As an example, let’s say that someone starts a billing cycle with a balance on their credit card of $400. On the 5th day of the cycle, they charge $150. On the 15th day of the cycle they charge $100, on the 22nd day a payment of $200 is applied to the account, and on the 28th day of the cycle $1200 is charged to the account.
Their billing cycle is 30 days, and their annual interest rate is 12.25%. What is the monthly interest?
To use the formula, we first have to calculate the average daily balance. I have written each day with the balance and included the 4 transactions just mentioned. To calculate the average daily balance, we add up each of the balances for each of the days and divide by 30, the number of days in the cycle. Which gives us $19,300 divided by 30, and this calculates to $643.33 rounded off.
Now we can use the formula. We have Monthly interest equals, $643.33, times 30, times 12.25% divided by 365. We need to convert 12.25% to a decimal by dropping the percent sign and moving the decimal 2 places to the left, which gives us .1225.
Doing the calculations, we get $6.48 rounded off. So, the monthly interest equals $6.48.
Timestamps
0:00 Formula to calculate monthly credit card interest
0:21 How to calculate the average daily balance
1:08 Example calculation of monthly credit card interest |
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credit card interest | credit card interest explained | average daily balance | how credit cards work | average daily balance method | average daily balance explained | how to compute average daily balance | how to calculate credit card interest | how to calculate credit card interest per month | calculate credit card interest per month | calculate credit card interest |
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