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### Course: Personal finance>Unit 3

Lesson 4: Credit cards and loans

# How credit card interest is calculated

Learn about average daily balance, grace period, and credit card interest. Created by Sal Khan.

## Want to join the conversation?

• It seems like there might be something i'm missing with this video. In the previous video describing credit card APR vs effective APR. the previous APR vs effective APR shows a compounding of the balance daily. This video shows that interest would only be compounded per billing cycle. What am I missing?
• Would I still have to pay interest if I pay the entire "statement balance" every month rather than the "total balance?" For instance, if my latest bill showed a total balance of \$100, but then I spend \$100 on top of that, could I pay off \$100 now and then \$100 next month without accruing interest, or would I need to pay off the entire \$200 before my next bill?
• I read a Chase cardmember agreement, and any payment you make is allocated to the balance on your monthly statement first. Therefore, the \$100 you pay off does get your outstanding balance paid in full, meaning you don't have to pay the interest.
• Will you be covering residual interest on credit cards?

Thanks,
Josh
• This problem doesn't make any sense to me. If you begin with \$100 balance and buy a sweater for \$100, you would owe \$100. Paying \$150, would give you a credit balance of \$50. This does not align with the graph above. Where am I seeing this wrong?
• Can't you just pay your credit card allowance on time?
• So the credit card bank gonna charge me for the TOTAL amount of interest during last cycle, rather than calculating based on the UNPAID part right?
• Can effective APR also be plugged in here?
• No, because effective APR takes monthly compounding into account: it's what you'd get if you plugged in regular APR month after month, compounding each time.

If you plugged in effective APR here instead of regular APR, your annual interest would be even higher than effective APR because of this compounding, so that's incorrect.