Calculating credit card interest is important in financial management for companies and creditors. Credit card interest is the standard method by which credit card issuers, whether banks or credit unions, generate revenue. The issuer provides a customer with an account number or a card for making payments or borrowing money from banks. This feature makes it necessary by measuring credit interests for people to keep track of their credits. Three key approaches are the Previous Balance Method, Revised Balance Process, and Average Daily Balance Method (ADB) (ASAP Credit Card, 2012). The Previous Balance Method involves charges 0.04931 per cent of the previous balance and multiplies the result with the sum of days in a billing cycle. In the Adjusted Balance system, 0.04931 per cent of the adjusted balance would be paid to a borrower. The changed balance is measured as a difference between the payments made and the previous balance. In a billing cycle, the adjusted balance is then multiplied by the sum of days (ASAP Credit Card, 2012).
The Average Daily Balance System imposes an average daily credit balance fee of 0.04931 per cent. For a borrower the best method is the modified form of balance. This approach is the preferred method since it results as interest to the lowest charges and new transactions are hardly accounted for during measurement. All payments are deducted from the previous balance before interest is added which makes it cheap to creditors (ASAP Credit Card, 2012).
The compounding power of interest may be applied in paying for a future expense. Taking an example of $100,000 as savings and a 10 per cent interest rate per month, the amount would be $110,000 by the end of the month, $121,000 by the end of the month end of the second month, and $133,100 by the end of the third month. That balance increases by 10 per cent of the total value of the principal and the interest accrued monthly (Kennon, 2013). The value of money would have grown to enough money possible to pay for future expenses while taking into account the devaluation of money over time.
The definition of credit rate estimation is basically helpful in determining the cost of owning a credit card, the borrowing costs and the best method to use make real time applications pay for interest rate payments on credit. Given a chance of a financial controller or financial manager in a financial institution, it would be possible to decide which method is perfect in benefiting the institution and evading credit risks while keeping investors happy (Kennon, 2013).
- ASAP Credit Card. (2012). Methods for Calculating Interest Charges. Retrieved May 17, 2013, from asapcreditcard.com: Http://www.asapcreditcard.com/articles/interest-calculation-methods.html
- Kennon, J. (2013 ). The Power of Compound Interest: How Compound Interest Can Make You Rich Through Sound Investments. Retrieved May 17, 2013 , from About.com Guide: Http://beginnersinvest.about.com/od/savingsanddebtmanagement/a/compound-interest.htm