How is interest calculated on a credit card with a 20% APR for a monthly payment?

The correct approach to calculating interest on a credit card with a 20% Annual Percentage Rate (APR) for monthly payments involves determining the monthly interest rate. This is achieved by dividing the annual interest rate (20%) by 12, which gives you the interest rate applicable to one month.

This method accurately reflects how lenders assess monthly interest charges. For instance, if the annual rate is 20%, the monthly rate becomes approximately 1.67% (20% divided by 12 months). This monthly rate is then applied to the outstanding balance on the credit card to calculate the interest that will be added for that month.

Using the original balance for interest calculation each month would not be correct, as credit card interest is usually assessed on the remaining balance after payments, not simply on the original balance. Similarly, adding a fixed percentage of the total balance or calculating interest based on total payments made would misrepresent how credit card companies compute interest. Interest accumulates based on the outstanding balance, which fluctuates with each payment and charge. Thus, dividing the annual rate by 12 to find the monthly interest rate is the proper method for understanding how interest is calculated on credit cards.