In financial management, the calculation of credit card interest is critical to organizations and creditors. Credit card interest is the standard way of generating revenue by credit card issuers, whether banks or credit unions. The issuer provides a customer with an account number or a card for making payments or borrowing money from banks. This aspect makes it necessary for people to keep track of their credits by calculating credit interests. Three main methods of calculating interest include the Previous Balance Method, the Adjusted Balance Method, and the Average Daily Balance Method (ADB) (ASAP Credit Card, 2012). The Previous Balance Method involves charges 0.04931 percent of the previous balance and multiplies the result with the sum of days in a billing cycle. In the Adjusted Balance Method, a creditor would be charged 0.04931 per cent of the adjusted balance. The adjusted balance is calculated as a difference between the previous balance and the payments made. The adjusted balance is then multiplied by the sum of days in a billing cycle (ASAP Credit Card, 2012).
The Average Daily Balance Method places charge of 0.04931 per cent of the average daily balance. The best method for a creditor is the adjusted balance method. This method is the most preferable method since it results to the lowest charges as interest because new purchases are hardly accounted for during calculation. All payments are deducted from the previous balance before adding interest making it cheap for creditors (ASAP Credit Card, 2012).
The power of compounding interest can be applied in paying for a future expense. Taking an example of $100,000 as savings and an interest rate of 10% per month, the amount would be $110,000 by the end of the month, $121,000 by the end of the second month, and $133,100 by the end of the third month. This amount grows monthly by 10% of the total sum of the principal amount and the accrued interest (Kennon, 2013). The value of money would have grown to enough amount of money possible for paying future expenses while accounting for the devaluation of money with time.
The concept of credit rate calculation is practically helpful in finding out the cost of owning a credit card, cost of borrowing, and the best method one has to use make payment for interest rate charges on credit in real time applications. Given a chance of a financial controller or financial manager in a financial institution, it would be possible to decide which method is perfect in benefiting the institution and avoiding credit risks while maintaining satisfaction of creditors (Kennon, 2013 ).
ASAP Credit Card. (2012). Methods for Calculating Interest Charges. Retrieved May 17, 2013, from asapcreditcard.com: Http://www.asapcreditcard.com/articles/interest-calculation- methods.html
Kennon, J. (2013 ). The Power of Compound Interest: How Compound Interest Can Make You Rich Through Sound Investments. Retrieved May 17, 2013 , from About.com Guide: com/od/savingsanddebtmanagement/a/compound-“>Http://beginnersinvest.about.com/od/savingsanddebtmanagement/a/compound- interest.htm
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