Minimize interest charges by understanding how Credit Cards calculate interest on your bill.
Probably going everybody this is bida bush for those of you that carry a balance on your credit card you might be interested on how they actually calculate the interest on your credit card now in understanding how they actually calculate this you may be able to exploit this fact and be able to somehow pay less interest so let’s look at how they actually calculate
This credit card works on the thing called an average daily balance they check out what your average daily balance for that statement period is and then they calculate how much interest you owe for that statement period a point of confusion is that they don’t actually do compounded interest as you go throughout the month so they actually just tally it up at the
End of the month only let me go through an example because this makes things a lot more clear for example on the first statement date you charge $100 on the first day and you wait 15 days and on the sixteenth day you charge another $100 so your statement balance is actually $200 100 plus another 100 and you don’t do anything for the rest of the same period so for
This example let’s consider a month where there’s only 30 days in order to calculate the average daily balance you can actually just go in your credit card and look at what your total balance is for that credit card for that day and you do this for 30 days add it all up and you divide that by 30 that’s your average daily balance but we’re going to do the simple
Math your instead where we go okay 15 days of it will have 100 dollars in it and the rest of the 15 days of a 30-day month it’s going to have 200 dollars in it so we just go do the simple math 100 times 50 and then another 200 times 15 and then you divide this by authority to get the average daily balance of $150 you would know counting on the ballpark is the first
Half you owe $100 the second half you owe $200 the average of that would be somewhere in between in this case it’s exactly $150 when do you see an apr on your credit card is actually something like 15 18 22 percent that is an annual percentage rate it’s the effective rate i wish you’ll get charged in the whole year but when you consider it on per month basis this
Is not exactly what you’re going to get charged you’re not going to get charged 15 percent in a single month so roughly you can divide this by 12 in order to get it but we wanted divide it by 365 days because some days of the month have 28 days i’m half 29 somehow 30 or 31 so we divide by 365 we get 0.04 1% and now in this current month that we’re considering
Has 30 days so we multiply this by 30 and then we get 1 point 2 3 3% so if our average daily balance is $100 we can easily do this math in our head the the interest that you owe will be a dollar 23 another example if your average daily balance is $1,000 it would be 12 dollars and 33 cents but in this case is $150 so we have to use a little bit more math here to
Use a calculator i don’t know how to do this in my head but it ends up to be a dollar 85 in interest why do i even bother with calculating the interest by hand it is because in doing so you can see but it’s highly dependent on the average daily balance for your credit card on that month this means that if you do owe something on your credit card and you’re paying
Interest the earlier you pay your payments the less interest you have to pay so for example you may want to do two payments a month where the first payment is after your first paycheck and you pay some amount maybe maybe half of it already then you would essentially reduce your average daily balance and in essence reduce the total interest that you pay now if you
Happen to get paid weekly or daily yeah you can go in there and keep on just paying a little bit at a time as much as you can every single day if you want and you’re going to effectively reduce your average daily balance a little bit more this really just says every single day that you have a smaller balance on your credit card the less interest you have to pay i
Hope this helps you understand how a credit card calculates the interest it charges you every single month don’t forget to check out my audible link down in the video description below where you can actually get a free audiobook even if you cancel the subscription and you can help in the fit this channel don’t forget to give me a like over your comment down below
Let me know if this video actually helped you save on interest payments i do have a patreon link over here where you can directly support this channel and don’t forget to subscribe over here thanks for watching oh yeah i’m wearing a suit because i just went to a wedding and i thought i’d just keep it on because it looks nice
Transcribed from video
How Credit Cards Calculate Interest | BeatTheBush By BeatTheBush
