How do credit cards calculate interest?

[FatJackSprat]

Is it just the interest rate times the balance once a month?

I loaned a family member some money and although I have reminded him a few times, it never seems to get here. I would just like to make a point about the amount he would owe me now if I was a credit card company.

If it's $100, would it just be:

Month 1: $100.00 * 3.9% = $3.90
Month 2: $103.90 * 3.9% = $4.05

Is it that simple or do they do some kind of daily interest rate?

 

[Garet Jax]

It is a bad idea to make the loan terms after the loan has been given and not paid back. Are you prepared to be on non-speaking terms with this family member over the money. If so, pursue it and charge whatever interest rate you think is reasonable (good luck collecting it). If not, forget about the money and never loan family money again.

 

[FatJackSprat]

Oh yeah, I would never try to collect the interest, I just want ot make a point with him.

It's not that much money, it's that I loaned it to my younger brother and I don't like to see him being what I consider irresponsible, so I thought I would point out that other people just don't let lateness slide.

 

[dman]

It's amortized. There's a formula to calculate it out. Or you can use a spreadsheet program.

For $100 * 3.9% = $3.90 for the year, so divide by 12 to get the one month add on for 'simple' interest.

Ammortized Example, use this and enter 0% for the second 'card'. Then divide the savings by 12 to get the 1month amount.

Your brother would owe you an additional $.33

Next month you can add the $.33 to the balance and calculate based on that.

Of course, for missing a payment you can jack his rate up like the cc companies do, something like prime +10% would get you up in the 13+% range for sure. At 14% and a $100.33 balance he'll owe 'ya an additional $1.24 next month.

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Cliffs Notes: Don't lend money to your brother, he's a financial risk. Cost: $100 & lesson learned.

 

[NogginBoink]

Read the fine print on your statement. It's in there.

Some use one-cycle average daily balance. Some use two-cycle average daily balance. Some use Martian math from the nth dimension.

 

[Thegonagle]

Probably using continuous compounding, backdated 30 days (or whatever the grace period is on purchases) when the grace period goes into effect.

The formula for continuous compounding is [balance] = Pe^(rt), where P is the principal, e is the natural base (it's on your scientific or graphing calculator), r is the interest rate expressed as a decimal (14.25% = 0.1425), and t is the time in years (1 month would be (1/12) ).