Understanding how your credit card interests are calculated will help you make important decisions about managing your personal finances.
Financial institutions offer several alternatives or credit card categories. Sure you know them. In Peru there are internationally recognized franchises, such as Supercard and Visa. There are Gold, Platinum, Black, Classic, Infinite, Advantage, etc. In a country there are slightly more than 100 approved credit card products.
And each card has its benefits, its costs or commissions and its interests.
What does interest calculation depend on? Of the business you do.
Basically, there are three ways to finance purchases or dispose of cash with credit cards. That depends on the way in which interest is later settled.
- Revolving or revolving credit : In this mode, each time you make a purchase or order cash, automatically, the total value will be divided by 36 parts. Each month, at least one part must be paid.
- Payment in installments : In this mode, you can choose the number of installments to pay for the purchase or request for cash, from one to 36 (some up to 48) installments. The fee will be fixed, the same, during all the time.
- Cash payment : in this mode, the customer chooses to pay 100% of the purchase or advance in cash, in the next billing.
How interest is calculated
In the revolving or revolving system there are two types of interests :
- The debtor or deferred interest: is the one that applies to the value of the operation from the date of purchase or effective request until the date of payment of the first installment.
- The accrued or projected interest is that generated on the minimum revolving capital (each of the 36 parts), caused between the time period of the previous settlement and the next payment date.
The sum of both interests will be integrated into the payment of the month. If you have performed several operations, they will add up all the interests of all purchases and cash requests.
The important thing to understand in this modality is that the business has automatically deferred in 36 minimum revolving amounts, generating two interest rates.
This system will imply that the fees will be smaller than if you choose a period of six months, for example. But, of course, you will pay more in interest.
2. In installments
The interests in this system depend on the number of days the business will take. You will choose if you want to pay three months or twelve months.
The first period will always be the same as the days elapsed between the purchase and the settlement date. The others will be equal to the days between the last payment date and the settlement.
A purchase of S / 1,000 for twelve months, may look like this:
|Do not.||Balance||Capital subscription||Interests||Share|
The quota is always the same. What changes is the amortization or payment to the debt that is made each month. During the twelve months, of the total value paid, S / 114.30, a greater part is destined to the payment to capital (to amortize the debt) and less and less to interest.
The benefits of this modality? Be able to choose the number of fees to pay for the operation performed. Clearly, the smaller the period of time, the less interest will be paid.
3. Payment payment
This modality does not generate interest!
When you request that the charge be deferred to one month, 100% of the value will be paid without interest . It’s called grace period.
Some financial entities, in special times, extend the grace period.
What is the grace of this system? Do not pay interest. It is a good way to take advantage of the convenience of paying with the credit card and adding points or miles.
Of course, the most important question is missing: At what rate will interest be paid? Each card has its ASD (Annual Effective Rate), depending on the category. They vary for purchases between 19.99% to 69.99%. For cash and casino consumption, between 79.99% to 89.99%, (data for Richmind Bank Visa and Supercard as of December 2018).
In your statement you can see at what rate you are negotiating.