Cost of using credit cards
About this video
Using a credit card's fee schedule, the video totals Riven's yearly cost: a 2% foreign transaction fee on $600 ($12), interest on a $1,500 average daily balance at 24.99% APR calculated daily ($374.85), a $35 late fee and a $95 annual fee. The total is $516.85, about $517.
You'll be able to
- read a credit card fee schedule and match each fee to how the card was used.
- find a daily rate from an APR and calculate a year's interest on an average balance.
- total the yearly cost of using a credit card.
Key words
- APR
- Annual percentage rate: the yearly interest rate charged on a balance.
- Daily rate
- The APR divided by 365, used when interest is calculated each day.
- Average daily balance
- The average amount owed on the card across the days in a period.
- Foreign transaction fee
- A fee, here 2%, on purchases made outside the United States.
- Annual fee
- A set charge for having the card, paid once a year no matter how it's used.
Transcript
- [Instructor] We are told Riven's credit card charges different fees depending on how someone uses the card. In a year, Riven did the following with his credit card, okay? He charged $600 for purchase while traveling abroad. Average daily balance of $1,500 to the year and he made a late payment once.
What was Riven's total credit card cost for the year, interest plus fees? So before I ask you to do this on your own, you might realize that there's not enough information here. You need to know what kind of fees does this credit card charge. And so for that, I will give you, I will give you this information and now pause the video and see if you can figure it out.
Okay, well let's just go line by line. This first line, he charged $600 for a purchase while traveling abroad. So are there any foreign transaction fees? Yes there are, 2% of the purchase amount for purchases made outside of the United States. So $600 times 2% or 2% of $600, that is going to be 2% of a hundred dollars is $2.
So 2% of $600 is going to be $12 in foreign transaction fees. Next, he carried an average daily balance of $1,500 throughout the year. Well, we see the APR is 24.99% calculated daily. So this calculated daily tells us that the daily rate is going to be 24.99% divided by 365.
That's what an APR really is. You divide that by the daily, the number of days in a year usually, and you get the daily rate. But if the average balance was exactly $1,500 through the year, well then, if you want to figure out the interest, you could say, okay, how much interest would Riven pay in a day?
Well, that'd be 1500 times the daily rate, which would be 24.99% over 365. But then Riven's doing this for the entire year. So then we would multiply that times 365, these would cancel and we can get a calculator out for this part. So the calculator, if I have 1500 times 0.2499, that is equal to $374.85.
So this over here is equal to $374.85 cents. All right, we've done these first two and then he made a late payment once. So late payment fee right over here, that is $35. So I'm feeling pretty good about it, but we aren't fully done. Let's just double check all of these fees.
There's an annual fee, you get charged, or Riven gets charged $95 once per year no matter what. So this is also going to be another fee. And then there's no balance transfers or cash advances. So I think we have covered everything. So we're going to add 12 plus $374.85 plus $35 plus $95.
Let's get the calculator back out for this. So we have the $374.85 already there. And then to that we are going to add $12. And to that we're going to add the $35. And then to that, we're going to add the $95 annual fee. I think I've gotten everything here. And so we get drum roll $516 and 85 cents.
And if this question like it does when you do the practice on Khan Academy, asks you to round to the nearest dollar, that would be $517. So approximately $517, and we are done.
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