Credit Card Compound Interest Example

Credit card issuers often use compound interest to determine what they (financing institutions) will charge customers for borrowing money.

The interest rate you have to pay is based on compounded-interest as following :

  • Interest on interest
  • Interest on principal

So, you need to know your current Annual Percentage Rate (APR) and your average daily periodic balance.

Compound interest problems are much easier to solve by using the multiplier method. It’s also efficient for calculating a percentage increase or decrease (depreciation).

Most credit cards performed monthly compounding. Your credit-card compound interest at your principal and they multiply that balance with your APR.

For example, let’s think of compound interest on credit cards for the average of the situation below.

Situation: John owe’s £1,200 on his credit card. His limit is £1,500. He pays interest at 1.5% monthly. Show that John exceeds his limit after 15 months.

Depend on you to use the app calculator such as above to calculate multipliers concept formula.