APR and monthly interest on Credit Cards

DartFrog_2

Could someone please describe the difference between APR and monthly interest on Credit Cards.

I know that this is a stupid question but each time I think I understand something makes me question my understanding!!!!

Thanks

Rafter

DartFrog,

Monthly interest is the interest paid on your average monthly balance.

APR is calculated from the monthly interest rate and is the annual equivalent.

The APR is not 12 times the monthly rate because of 'compounding'

Because you pay interest on interest the rate 'compounds' to a higher number.

Let us say that your monthly interest rate is 1% and you have a balance of £1000.

In month 1 you pay 1% of £1000 or £10 in interest.

Assuming you spend £50 in the next month and pay £50 off as well.........

In month 2 you pay 1% of £1010 or £10.10 in interest.

If you add up all the interest for 12 months using this technique you would pay £126.83 in interest in total in 12 months.

The APR is therefore 126.83/1000 or 12.68%

If you have access to excel the formula to do the conversion is.....

=((1+monthly rate)^12)-1

in the above example...... =(1+1%)^12-1 = 0.1268 or 12.68%

ta da!!!!

R.

DartFrog_2

Sorry, I'm new to the forum and haven't had a chance to learn how to do everything and can't say thanks like the others yet!

So thanks very much for the reply, that makes is really clear!

Angie8

There are a few credit card calculators available on the web which will do the APR to Monthly conversion for you to make it easier to see.