Although many of you might be using certain finance apps to keep track of finances, some might want to calculate your credit card debt manually. Certain search terms prompted me to publish this post on an easy method to follow in order to calculate your credit card debt.
Here are the simplest steps to follow to find out how much you owe to the credit card company at the end of each billing cycle.
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The numerical value denoting a percentage accompanying your credit card statement is the APR or the Annual Percentage Rate (a value that corresponds to 18 % or 20% or something similar). It is the cost of your borrowing the money and is calculated for a period of one year. It is different from the annual percentage yield (which is usually higher) as this value takes compound interest into consideration while APR does not.
Step 1, calculate interest rate
If your credit card interest is charged on a daily or on a monthly basis; to arrive at the rate of interest you pay, you simply divide the APR by 365 in case it’s charged daily or by 12 in case it’s charged monthly.
Step 2, calculate interest charged
Consider the following hypothetical scenario:
1.You owe $5000 at the beginning of the billing cycle and paid back $3000 on the 5th day of the month, then you will be charged an interest on the sum of $5000 for 4 days (since you owed this amount only for 4 days) and you will pay the daily interest that you calculated for that period.
2. You charged $600 to your credit card on the 15th day of the month. Your interest will be calculated for the previously owed amount of $5000-3000= $2000 for a period of 10 days (5th to the 15th day)
3. On the 15th day, you owe $2,600 in principal, not taking into account the interest.
4. On the 27th day, you decide to pay back another $1000 and arrive at a new credit card balance of $1,600. You will be charged an interest on $2,600 for a period of 12 days (15th to 27th)
5. Suppose, you did not use your credit card again for the rest of the month, your previous due of $1,600 will become the opening balance for the next cycle and you will pay interest on $1,600 for 4 days as on 27th, 28th, 29th and 30th day in a 30 day billing period.
6. We now calculate the interest on the average amount owed during the month. For this, we add up the daily balance and divide it by the number of days of the month to arrive at a value. Here’s how: ($5000*4+$2000*10+$2600*12+$1600*4)/30 =$2586.67 approx.
So, you owed a sum of $2586.67 for every day of the month and your interest will be calculated on this amount.
If the APR is 18%, then the monthly interest rate is 18%/12= 1.5%.
Therefore, 1.5% of $2586.67 is around $38.80.
Your total debt carried from the previous billing cycle is $1,600+$38.80 =$1,638.80 and this is the amount awed at the beginning of the new cycle.
Thanks for reading.
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