When it comes to credit card interest it's really not that complicated to understand how it works
but when it comes to the credit card companies themselves explaining how it works they don't
do a very good job of this because i feel like they want us to stay confused so i'm just going
to break down credit card interest in this video so that you guys can understand how it works
so i'll be going over the easiest way possible to figure out how much interest you're going
to be paying on your credit card so that generally you can know how much to expect to pay
and i'll also teach you how to not pay interest on your credit cards which is a very easy approach
now before i get into all the interest stuff i first need to go over a few terms that you've
probably heard of when it comes to your credit cards the first one we're going to need to talk
about is the billing cycle and then the statement balance and then the due date and then once we get
these understood then we'll go right into the interest now the first term that i need to go
over for you guys is called the billing cycle and the easiest way that i can describe it
is it's just the invoice period that the credit card uses which is usually a month long
to charge you for the previous month so basically if you have a 30 day month then you get charged
for 30 days of those purchases and then you have to pay it back in the following month and that's
the way that the billing cycle works is it's just a month to month billing cycle so if your
billing cycle starts on the 15th of the month and it happens to be a 31 day month then the
cycle is going to end on the 16th the following month now this can get kind of confusing because
whenever you open up a credit card and you start using it that's when your billing cycle starts so
it's not always going to start on the first of the month now something i do personally i always call
up the credit card company as soon as i get a new credit card and i make sure that the billing cycle
starts on the first that way it always ends on the last day of the month so it's very simple to
understand because if you've got a couple credit cards and they both have different cycles going
it's really hard to determine when those due dates are going to be because they're always going to be
different from one another so the easiest and best advice i can give you guys is to call up
the credit card company and make sure that your billing cycle starts on the first that way it
always ends at the end of the month now once your billing cycle ends the credit card company is then
going to take all of those purchases and they're going to condense them into your statement balance
which is what you actually owe for that billing cycle now the way that it works is they're going
to give you a due date which is generally going to be 25 days after the cycle ends so if your billing
cycle ended at the end of the month then your bill is always going to be due around the 25th of the
26th of the next month and that is what the due date is and that's how that works as well so if
you ended up spending a thousand dollars during your billing cycle then the statement balance
is going to come out and you're going to owe a thousand dollars on the statement balance plus
if you're accruing any interest or fees anything like that that'll also be on the statement
and then it's going to be due about 25 days later as your due date and that's how it works and at
this point in the video if i am making sense about what i'm talking about can you please just comment
down below and say i got it that way i can tell if what i'm saying is making sense to you guys
thank you very much now the trick to never paying any interest on your credit cards is very simple
and all you have to do here is just pay off your entire statement balance in full every single
month by the due date and as long as you do that continuously you will never pay any interest on
your credit cards and it's as simple as that but the scary thing here is that if you don't pay off
that statement balance in full every single month then you are going to be accumulating interest
so for example if you owe a thousand dollars on your credit card and you pay all the way up to 999
bucks by the due date that's not paying it off in full so in this case you are going to start
accumulating interest not only on the one dollar but also it's going to backlog onto that 999 of
purchases that you made plus any purchases that you make during the grace period now the grace
period i don't want to confuse you guys here but this is just the gap between the cycle ending and
your due date so that 25 day period where you can also make purchases you're going to be charged
interest on those as well if you're not paying off that statement balance in full every single
month and then to make everything worse if you are paying interest on your credit card because
you didn't pay off the statement balance in full then it generally takes two billing cycles of
paying off the statement balance in full in order to get rewarded and not pay interest again from
the credit card so usually it's going to take two months of doing what you're supposed to in order
to stop paying interest now just keep in mind that every credit card out there has different rules
so if you are curious about any of this kind of stuff just make sure to check your contract
or call them specifically because if you're just taking my advice here then you could be wrong
so i just want you to be careful here now that you know some of the basics of how credit cards work
i'm going to teach you how the interest is charged in a very general way and most of the credit cards
out there are going to be using a method called adb which stands for average daily balance
now there's other methods out there that credit cards use but i wanted to use this one because
it's the most general for most of the cards out there i'm going to teach you how this works
so the easiest way to understand how the average daily balance works is that the credit card
company is just going to take each day during the cycle and they're going to add up your balance for
each of those days and then they're going to take an average and they're going to multiply that by
the interest rate and that's what they're going to charge you is that final interest rate based
on your average daily balance so if you want to figure out the average daily balance for yourself
then all you have to do is just go into your billing cycle so for instance if it was the
first through the 30th then just look at the first find out what you owed that day and then
add it up and then add up the second and the third and the fourth and go through the entire month so
that you get the entire accumulation of all of those charges and then divide that by the total
amount of days in the cycle and that will give you your average daily balance so for an example here
let's say that you have a 30-day billing cycle now all you're going to do is just add up the balance
every single day during that month so let's just pretend that you add up all those days and you end
up with 36 000. now all you're going to do is take 36 000 and divide it by the number of days in the
cycle which in this case would be 30 so 36 000 divided by 30 ends up being 1200 and 1200 bucks
is your average daily balance for this specific example so now we know how much the average daily
balance is which is 1200 in this example but we want to know how much interest is being charged
so in this case let's just pretend that the credit card issuer has a 20 interest rate all we're going
to do is get that down on a monthly level so just take 20 and divide it by 12 and that ends up being
a 1.6 monthly interest rate because we're just being charged on a monthly cycle so now we'll
just take the 1200 average daily balance and we'll multiply that by one point six percent interest
and that's going to end up being about 19 that we're going to pay in interest for that specific
billing cycle and this is just the basic math and a basic idea of how to do this now this was
just very basic math when it comes to the average daily balance method and it's never going to be
totally accurate it's just a good way to ballpark about how much interest you're going to be paying
now the reason i say that it's not accurate is because credit card companies always have variable
interest rates meaning they can fluctuate during the month so for instance it might be a 20 to a 24
variable interest rate and they can change that based on a bunch of different factors and you
don't actually know when or how that's going to happen so in order to do the math accurately
you've got to know the exact interest rate that's never going to happen with credit cards but you
can just get a general idea for instance if it was 20 to 24 percent just assume maybe 22 percent do
your math and you'll be close enough now if you do happen to be paying interest on your credit
card i have a little hack that can help you save some money and the way that you do this is just
by getting your average daily balance a little bit lower every single month now the way that you can
do this is that you want to make your payments as often as possible towards the beginning of
the cycle because if you pay off that amount of money towards the beginning rather than the end
then you are going to be making that average go down a little bit and that will save you money
and interest so if you do end up with any extra cash rather than just saving it up and making
one payment on your credit card use that money as soon as possible so that you can take that
average and you can start chiseling it away and getting it lower and then you'll pay less
in interest rather than just saving up and paying once per month now if you just found this channel
i'm jason with honest finance and i make a lot of videos on different topics that'll give your life
and your finances more value so feel free to subscribe if you guys are into that type
of content also i'll just leave some more credit card videos over here that you guys
can watch if you have an interest but thank you for watching this video have a great day