OT - calculating credit-card interest/APR

[Aaron Gaudio]

You need to read the very fine print in your credit card agreement. I
think credit cards typically use an average daily balance for the month
(or sometimes 2 months, or whatever your billing cycle is; or many cards
use a 2-cycle method), then go back and retroactively compute the
interest rate on a daily basis, but not compounding daily. It's somewhat
more complex than p=vr^t though. And you also have to take into account
grace periods, and if your rate is variable (what happens if prime rate
changes in the middle of a cycle? your card terms should say). Also keep
in mind that cash advances (and balance transfers) are typically charged
different rates, with no grace periods. All that's not even including
promotional rates that wear off.

Amortization is certainly not the correct way to just calculate the
payments, since a credit card is basically like an interest-only loan,
with the addition of a minimum payment (which also differs based on card
terms). You can choose to pay the minimum payment for decades if you
want.

Nevertheless, if you want to know the best way to pay down your credit
card- pay the balance every grace period. :)

On Wed, 2004-09-22 at 10:40 -0400, Derek Atkins wrote:
> I think it depends on the card, but I do believe that interest is
> compounded daily, but it's only _applied_ monthly.
> 
> -derek
> 
> Perry Smith <pedz at easesoftware.net> writes:
> 
> > I disagree that credit cards compound interest daily.  They have a
> > daily rate but that is not the same.  You do not pay interest today
> > that was charged to you as interest yesterday (which is daily
> > compounding).
>