🍲 Don't let INTEREST eat your lunch 🍛 - A guide to taming the credit card interest beast 👾

Each billing period, usually a month, you can use/spend/borrow an amount up to the credit limit. If you exceed the credit limit, most credit card providers will block that transaction as you have gone over.

At the end of each month, there will be a minimal payment you will have to pay back/clear off the credit card bill. If you fail to pay that minimum amount, the remaining bill will roll on to the following month and will eventually have a percentage % interest added onto it.

The amount that is used to calculate the interest varies with different credit card providers. Some use end of month balance, most actually use Average Daily Balance.

Credit card companies 💳 calculate average daily balance ⚖️ by adding up your daily balances throughout the billing cycle (25-31 days) and then dividing that total by the number of days in the cycle. Basically estimating the average amount you borrowed each day throughout that billing period.

Here's a breakdown of the steps involved:

1. Calculate daily balances: Your daily balance is the amount you owe on your credit card at the end of each day within the billing cycle. This includes your starting balance of each billing period (what you left over uncleared from last month's bill), any new purchases made, and any payments or credits applied.

2. Add up daily balances: Sum up all of your daily balances for the entire billing cycle.

3. Divide by the number of days: Take the total of your daily balances and divide it by the number of days in the billing cycle.

   
   

Example:

Let's say your billing cycle is 30 days and you have the following daily balances:

You started off this billing period month with £500 left unpaid from last month

• Days 1-10: £500

Spent £200 on day 11

• Days 11-20: £700

Spent £300 on day 21

• Days 21-30: £1000

To calculate your average daily balance:

 * Total of daily balances: (£500 x 10) + (£700 x 10) + (£1000 x 10) = £22,000

 * Average daily balance: £22,000 / 30 days = £733.33

Once you have your average daily balance, the credit card company will multiply it by your daily periodic rate 🔣 (annual percentage rate APR divided by 365 days per year) to determine your interest charges for the month.

Back to that scenario above, for an average 15% quoted annual percentage rate APR, you will be changed next month:

To calculate the interest charged, we'll first need to determine the daily periodic rate (DPR).

Calculating DPR:

DPR = APR / 365

DPR = 15% / 365

DPR ≈ 0.0411%

Calculating Monthly Interest:

Monthly Interest = Average Daily Balance x DPR x 30 (assuming a 30-day billing cycle)

Monthly Interest = £733.33 x 0.000411 x 30

Monthly Interest ≈ £9.03

Therefore, you would be charged approximately £9.03 in interest for the month.

Most common high street credit card providers charge approximately range from 12.9% up to around 31%. It really varies depending on economic climate, certain card offers, individual credit history and other associated perks the credit card companies are providing for using the card.

Monthly/Annual fee

A few providers also may have an annual or monthly fee for having the 'privilege' 👑 to use their card/services. So always look at the details and small print of all card provider websites or even use comparison websites instead.

Fixed vs Variable rate

Look out for some providers tempting you with ⬇️ lower fixed interest rate for first few months or years and then changing it to a flexible ⬆️ high interest rate later on. As you know, these deal makers often take advantage of the fact that once you get settled in, you will either forget about the change or cannot be bothers to change. I.e. Low rate to start with, then increase the interest rate later on.

Therefore, generally speaking, the mindset should be: the lower you maintain your daily outstanding balance, the lower the interest will be added that you have to pay. The higher you keep your daily remaining balances, the higher the interest they will charge. 

The Debt Snowball ❄️

So if you don't clear your monthly bill every month, you have to be prepared to run on high average daily balances thoughtout the next month which would increase your interest payments subsequently. This can generate a compounding effect to grow the debt exponentially. For many people, that's how the debt snowball begins...

I have met many people throughout my time in real life situations who have rolled on so much credit card debit that the cumulative interest they are charged are actually bigger than the amount they actually spent in the first place. Spending amounts where they can't pay back, the interest applied on it are not cleared, then they spend more, and more unpaid interest on top applied, so on and so forth.

In worst case scenarios, some people then apply for more credit cards to cover older uncleared credit cards. After most credit card companies reject these applications, people then turn to loan sharks and common street side lenders. Charging over 50-100% interest per week!

Your Due Diligence 🤓

Before committing to any credit card providers. Do complete you own due diligence to read through various credit card providers and cross-referencing the information with independent comparison websites who often list everything out for you in simple-to-read table format for ease of understanding.

Recommended comparison websites:

 * MoneySavingExpert: https://www.moneysavingexpert.com/ 

 * Compare the Market: https://www.comparethemarket.com/ 

 * MoneySuperMarket: https://www.moneysupermarket.com/ 

By using these websites, you can compare APRs, fees, and other features to find the best credit card for your needs.

In next blog post, we are going to talk about credit limits, a vital piece of credit card knowledge that may have a significant impact on your mortgage, financial health and other aspects of life!

**DISCLAIMER**

All content provided on this platform is intended for informational, educational and entertainment purposes only, and should not be construed as strict financial advice. The information presented does not constitute a recommendation to buy or sell any specific security, investment product, or service. Investing involves risk, including the potential loss of principal (money). It is important to conduct thorough research or consult with a qualified financial advisor before making any investment decisions.