Credit Card Interest
from  - Math in Daily Life

Savings accounts offer between 2% and 3% interest while credit card interest on unpaid balances can be as high as 20%.

Some Basic Principles
Banks use what is known as "simple interest" for customer Savings Accounts, which is paid because the bank can use customer money while it is deposited for loans and investments.  The Simple Interest is the bank's way of paying for that privilege. Simple interest is calculated only one time in a given time period - say once a year.

The money earned on savings is calculated by multiplying the principle by the interest rate.
In the case of a savings account in the amout of $1000, the principle ($1000) is multiplyed by the interest rate (3%) and would equal $30 in the course of a year.

Credit Card Interest is ... interesting because of the concept of Compound Interest and because you are playing the bank's role as the person who pays the interest. This is really calculating Interest on the principle and the interest  and works like this:
Credit card companies might advertise annual interest rates of  12% and in the very tiny print of the contract it would be explained that that 12% interest is calculated 12 times a year at a rate of 1% on the unpaid balance. Soooooooo,

For a credit card balance of $1000, the first month's interest would be $10
which is added to what you owe, or $1010.
If you pay the minimum payment of $5, your balance is now $1005.
Next month your new balance would be $1005 plus $10.50, or $1015.50
and so on ....
Unpaid balances plus accruing interest means you'll never get this thing paid off unless you pay the principle way down.

Here's some other terms to know:

Minimum payment - this is usually equal to 2% of your average balance. On $1000 your minimum payment would be $20 and if you just pay that, and the compounded interest brings the debt to $1010 you'll pay off the debt at a rate twice as slow as it seems.  Credit card companies are "banking" on you not paying more than the minimum payment.

Each ccredit card company is allowed by law to "determine its own method of computing" finance fees.  It is always better to pay off your entire balance each month to avoid these fees.

The Annual Percentage Rate (APR)  - can be fixed or variable where "fixed" is the best deal for the consumer. The variable rate changes according to economic fluctuations.

Grace period is the time between making a purchase with your credit card and the levying of finance charges and interest.
A grace period of 25 days or more is a pretty good deal.

Back to Syllabus