Interest rate confusion - Help ! (please :-) )

Kev64

Hi,

I'm trying to move balances around my four cards, but I'm getting in a pickle with which is the cheapest, what with companies quoting annual rate, apr and monthly interest rates. I've just rang all four companies to check the current rates and keep getting quoted annual rates, when my statements refer to monthly rates. When I ask them to convert that to monthly, they go quiet and then come up with a figure that doesn't seem to make any sense. The lady at Lloyds just divided the annual figure by 12 - which I'm sure can't be right !

e.g. My Egg card online banking screen says I'm paying "16.9% pa variable for purchases" - and when I rang up, I was told this was "1.313% per month".

To be honest, none of the customer service reps I spoke to filled me with any confidence that they were giving me the correct figures !!

How am I supposed to know which is cheapest ? Obviously I need to compare figures on a level playing field, so should I ask for the "annual rate", the "a.p.r." or the monthly rate ?

Many thanks in advance !

CLAPTON

when comparing interest rates use the APR.

to convert monthly to APR is a bit complicated but simply multiplying by 13 gives a good approximation

so 1.313% monthly is an APR of 16.9% (while 1.313% x 13 gives 17% which is quite close)

Rafter

Kev,

It is confusing - even the credit card companies find it hard to explain their own calculations......

Here is the logic using your egg card example.......


If you have a £1000 now you will be charged £13.13 in interest this month (1.1313% per month)

Assuming next month you made no payment, or made a £10 payment and £10 purchase you balance would be £1013.13. You would pay interest of £11.46 this month because you would be paying interest on the interest from last month too.

This is called 'compounding'.

It works against you when you borrow, but is also why savings and investments grow so much over a long period, if you re-invest the dividends or interest you received.

To get from a monthly rate to an annual rate you need to 'compound' the interest over 12 months.

The easiest way of doing this is using a spreadsheet.

Use this formula

=(1+1.313%)^12-1

and you should get the answer 0.169451 which is 16.9% (rounded down)

As long as you are comparing monthly rates or APR rates you should be fine.

Most cards should offer you an 'existing customer balance transfer deal' to move balances. Just be very careful about balance transfer fees for doing this though as they can wipe out a lot of the saving.

If you don't already have one, try to get hold of a 'life of balance' balance transfer deal which might be a cheaper option for you - alternatively you could consider a personal loan and pair of kitchen scissors approach and consolidate the cards and cut them up to remove the temptation to start filling them up again!

Good luck.

R.

Kev64

Thanks for the replies - very informative. In that formula, does the '^' symbol mean 'to the power of' or multiply ? Sorry - I can't quite get it !

I thought it was a bad idea to consolidate ? - I've never fully understood why though ! It would save me a lot of hassle to just do that. Why do people say not to consolidate ?

CLAPTON

yes the symbol ^ means to the power of .

people say not to consolidate in certain circumstances.
basically you need to address the reasons why you are in debt first i.e. start to live within your means and indeed below them and so start to save.
if you dont do this, many many people find they consolidate all their credit cards into a loan thus reducing the monthly outgoings but then start to use the credit cards again....so in a couple of years they need to consolidate again and so now have two long running debts and they start to use the CC again...

used properly as simply a way of reducing interest and hence to pay off the debts more quickly they make sense but most/many people extend the period and reduce the monthly spend so they dont need to address their spending habits until it becomes a crisis.