Simple and compound interest

sammi.jo

Hi, I've got a Capital One progress card. I only got it because my credit rating was so poor (unpaid debts at 18 and a default) that I was unable to get contract phones. The credit builder card allowed me to move onto this one, and it seems to work so far!

However, on my statements it says:

This month's interest is based on the
following simple annual rates:
Standard Purchase: 26.480%
Standard Cash Withdrawal: 26.480%
Standard Balance Transfer: 26.480%

But then I got a letter saying that my interest rates have 'shrunk' to 27.9%pa.

I phoned up (because I'm a ditz at this stuff) and they one is simple interest and the other is compound. I asked him to explain it, but he was as useful as a porous fishbowl.

What is the difference please? :embarasse

nomoneytoday

If you have £100 and get 10% flat interest then every year you'll have £10 interest.

However, if you were to compound it, in year 2 you would get 10% of 100+10 and in year 3 you would get 10% of (100+10+11)

CLAPTON

the simple interest rate allows you to work out the interest on your monthly statement if you so choose

so if you owe 100 for 30 days the interest would be

100 x 26.48% x 30 /365

whereas if you wanted to deduce that form the APR you would need to work out the simple rate daily rate by calculating

= ((1+27.9%) to the power of 1/365) -1)

which some people would find more difficult

however they are obliged by law to quote the APR

zagfles

Compound means it accounts for interest on the interest. Eg if the rate was 2% per month and you owe £100 for the whole month you'd pay £2. But the next month you owe £102 so you pay interest on £102 not £100, so it'd be £2.04, and so on. A 2% monthly rate works out to an APR of 26.8%

But it sounds like what you were told was rubbish - credit card companies invariably quote all annual rates as APRs, an APR will always account for compounding.

SnowTiger

zagfles wrote: »

Compound means it accounts for interest on the interest. Eg if the rate was 2% per month and you owe £100 for the whole month you'd pay £2. But the next month you owe £102 so you pay interest on £102 not £100, so it'd be £2.04, and so on. A 2% monthly rate works out to an APR of 26.8%

Presumably this assumes no payments are made to the account? In which case the APR is probably the least of the borrower's worries.

zagfles wrote: »

But it sounds like what you were told was rubbish - credit card companies invariably quote all annual rates as APRs, an APR will always account for compounding.

Rubbish? Capital One quote simple annual rates on their statements. Well, at least on my statements and those of the OP.

zagfles

SnowTiger wrote: »

Presumably this assumes no payments are made to the account? In which case the APR is probably the least of the borrower's worries.

The APR is always calculated assuming compounding for a year and no payments. Regardless of any payments required, and regardless of whether the loan is going to last a year.

That's why payday loans always have massive APRs, because even for a loan that only lasts a week, the APR is calculated on that loan compounding for a year. For instance 10% for a week is an APR of 14,104%

Rubbish? Capital One quote simple annual rates on their statements. Well, at least on my statements and those of the OP.

Do they? Never seen that before - I presume they make that clear and also quote the APR?