Calculating Interest

For the purposes of this course we calculate interest using the simple interest formula. This is NOT exactly how the credit card companies calculate interest - their method is MUCH more complex. However, this will give you the general idea of where interest comes from.

Example

Fred made $2500 in purchases on his card in June. He does not make any payments on his June statement. How much interest will be charged on his July statement if his interest rate is 19.5%?

Solution

Fred pays no interest in June. (Credit card companies typically give one month of free interest on purchases). He will pay one month of interest on his purchases for July. In this example, P = $2500, R = .195 (convert percent to a decimal), and T = 1/12 (one month out of 12 months in a year.)

I = PRT
I = (2500)(.195)(1/12)
I = 40.625

Fred will be charged $40.63 interest on his July statement.

Calculating New Balance

A person's new balance is found by adding their previous balance, the amount of any purchases made, and any interest charges incurred. You subtract the amount of any payments made.

Example

Fred's monthly statement shows a previous balance of $2500. He has interest charges totalling $40.63. He made a payment of $1300, and purchased goods totalling $475.50. Calculate his new balance.

Solution

New Balance = Old Balance + purchases + interest - payments
New Balance = 2500 + 475.50 + 40.63 - 1300
New Balance = 1716.13

Fred's new balance on this month's statement is $1716.13.

Minimum Monthly Payment

Example

Fred's minimum monthly payment is 5% of his closing balance or $10 whichever is greatest. Using his balance of $1716.13 from the previous example, calculate his minimum monthly payment.

Solution

Figure out 5% of Fred's closing balance:

$1716.13 x 0.05 = $85.81

Since $85.81 is larger than $10, his monthly payment is $85.81.