Methods of Charging Interest
Annual percentage rate is the principal means of comparing credit products. Because interest is compounded on a periodic basis (daily or monthly), to calculate charges on a credit card account the APR has to be de-compounded. Most major banks use the following methodology:
Increase the figure to the highest possible value while still meeting advertising requirements. e.g., if a card is advertised at a percentage rate of 17.9, then any value up to 17.949% will still be rounded down to 17.9%, and thus still be correct. Once this number has been derived, it must be converted to a decimal multiplier – in this case the number would be 1.49575%. This is a monthly periodic rate derived by dividing the APR by 12. This number will provide you with a rate which, when compounded over a year, will equal the EAR.
At this point, it is important to round down – because the APR has already been maximised in order to make use of the highest rate possible, rounding any figures up might push the APR over the edge and onto a higher rate, leaving the card issuer liable for false advertising claims.
This method is subject to change, depending on the bank in question, and is highly influenced by cardholder perceptions and bank strategy, sometimes with a value of simplicity for cardholders; other times with the effect of obfuscating the true interest rates charged.
Methods vary by country because of customs and laws. A brief summary of each of the four methods given under U.S. Regulation Z follows. This list is followed by a few examples from other countries and some discussion of differences between the various methods:
Read more about this topic: Credit Card Interest
Famous quotes containing the words methods of, methods, charging and/or interest:
“If men got pregnant, there would be safe, reliable methods of birth control. They’d be inexpensive, too.”
—Anna Quindlen (b. 1952)
“A woman might claim to retain some of the child’s faculties, although very limited and defused, simply because she has not been encouraged to learn methods of thought and develop a disciplined mind. As long as education remains largely induction ignorance will retain these advantages over learning and it is time that women impudently put them to work.”
—Germaine Greer (b. 1939)
“Faster than fairies, faster than witches,
Bridges and houses, hedges and ditches;
And charging along like troops in a battle,
All through the meadows the horses and cattle;”
—Robert Louis Stevenson (1850–1894)
“Social Security is a government program with a constituency made up of the old, the near old and those who hope or fear to grow old. After 215 years of trying, we have finally discovered a special interest that includes 100 percent of the population. Now we can vote ourselves rich.”
—P.J. (Patrick Jake)