The Evil Effects Of Compounded Interest on Card Debt

Credit card interest can be compounded daily or monthly, which means card debt can easily get out of control if you have a high balance and high interest rates.

Most charges are computed daily, i.e. compounded daily. To calculate the daily finance charges, credit card companies multiple the daily balance by the periodic rate. This daily finance charge is calculated on a daily basis and the result is added to the outstanding balance.

For example, if you have a balance of $100.00 and the period rate is .04375% (divide .04375% by 100 to get .0004375), then the daily finance charge would be computed as follows: 100 x .0004375 = $ 0.04375, in other words 4 cents, rounded up. The next day’s balance would be $100.04. Total finance charges for a 30 day billing period would be $1.20. This example assumes no purchases or payments for simplicity.

If your credit card interest rates are compounded monthly, then they add the daily balances for the billing period and divide by the number of days in the billing period. Multiply the result by the monthly rate.

Credit card companies are required to give you the periodic rate, billing cycle/billing period and explanations of the various codes and rates.  This information is on your statement somewhere. You may have to read the fine print to find it.

Most credit card companies allow you to make more than 1 payment monthly.  Setting up an online account will make this more convenient and may be one way you can reduce the impact of compounding interest.

If you can only afford the minimum payment, it could take you years to pay off the balance. In this case you need to take aggressive action to get the balances paid off or reduced.

Be Sociable, Share!