INT%: Promotional APR Period has Expired. Now What?
So you took advantage of the 'NO INT W/PYMTS FOR 12 MOS' payment option when you decided to put your recent purchase on a credit account. Now, the Annual Percentage Rate (APR) promotional period expired at the end of last year; and you didn’t make any payments towards your credit account balance. What should you expect to happen next? The remaining 'unpaid' credit account balance will be assessed with the APR that was disclosed to you at the time you accepted the deferred-interest payment promotion. The credit issuer will start to impose interest charges on your purchase until your credit account balance is paid in full.
How much interest will be charged you may be asking? To understand 'how much' and 'how' the interest was calculated on your 'unpaid' balance, let's look at our most recent Credit Account Summary Statement (we will need paper, a pencil, and a calculator to perform the below calculations):
Now, let’s scroll through our statements together and write down the following data:
DAYS IN BILLING PERIOD:
See Current Billing Period: 30 Days
ANNUAL PERCENTAGE RATE (APR):
See Purchases: 19.74% V (Variable)
See Cash Advances: 28.74% V (Variable)
BALANCE SUBJECT TO INTEREST RATE (BSI):
See Purchases: $7,217.62
See Cash Advances: $131.77
The 1st calculation determines the account's Daily Periodic Rate (DPR) for both our purchases and cash advances, if applicable:
Formula: Divide the Purchase APR by 365 days: 19.74%/365 = 0.05408219178% DPR
Formula: Convert your DPR to a decimal by dividing by 100: 0.05408219178% DPR /100 = 0.00054082191
(Note: Move the decimal to the left two places - this adds two zeroes immediately after the decimal point.)
Formula: Divide the Cash Advances APR by 365 days: 28.74%/365 = 0.07873972602% DPR
Formula: Convert your DPR to a decimal by dividing by 100: 0.07873972602% DPR /100 = 0.00078739726
(Note: Move the decimal to the left two places - this adds two zeroes immediately after the decimal point.)
The 2nd calculation determines the amount of interest charged for both our purchases and cash advances, if applicable:
Formula: BSI x DPR x Days in Billing Period = Interest Charged
Formula: Purchases: $7,217.62 x 0.00054082191 x 30 = $117.103411021 rounded to $117.10
Formula: Purchases: $131.77 x 0.00078739726 x 30 = $3.1126601085 rounded to $3.11
The Total Interest charged on my credit account's 'unpaid' balance was $120.21 ($117.10 + $3.11) during the last (30) days billing cycle.
Next, we will discuss what happens if we apply only a Minimum Payment to our ‘unpaid’ previous credit account balance. Using the same Credit Account Summary Statement, let’s locate the following information:
PREVIOUS BALANCE (PB): $7,320.66
MINIMUM PAYMENT (MP): $147.00
INTEREST PAYMENT (IC): $120.21
NEW BALANCE (NB) = $7,293.87
The 3rd calculation determines if the entire Minimum Payment or a partial Principal Payment was applied to our Previous Balance:
Example #1:
Formula: PB – MP = New Balance
Formula: $7,320.66 - $147.00 = $7,173.66
Example #2:
Formula: PB – MP + IC = New Balance
Formula: $7,320.66 - $147.00 + $120.21 = $7,293.87
The 4th calculation determines how much of a Principal Payment was applied to our Previous Balance:
Formula: MP - IC = Principal Payment (PP)
Formula: $147.00 - $120.21 = $26.79
Based on the results in Example #2, my Previous Balance was only lowered by $26.79. Within the next billing cycle, I would need to make an additional $120.21 to the Minimum Payment to reduce the Previous Balance by $147.00.
Note: Please Read the Minimum Payment Warning that is referenced in your statement: If you make only the Minimum Payment each period, you will pay more Interest and it will take longer to pay off your credit account balance:
Paying ONLY the Minimum Payment for the next 29 years, I will end up paying an estimated total of $33,390.00.
Paying $271.00 for the next 3 years, I will end up paying ONLY an estimated total of $9,746.00
(Savings= $23,644.00).