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Tuesday, 30 July, 2002, 16:43 GMT 17:43 UK
Credit card deals made simple
There are many types of credit card
Pick a card, any card...

Never cared for double maths on a Tuesday afternoon? Well it's you versus the banks - and BBC News Online is taking you into battle.
You've picked out a mobile phone deal, deciphered the train timetables, you're ready for your next challenge - credit cards.

The deals offered by the High Street banks are "complex", "uncompetitive" and take an "unreasonable amount of time" to figure out.

It's a maze

Professor Sebastian Van Strien
That's according to Tuesday's Commons report, which admitted it took a Cambridge maths expert a whole afternoon to figure out just one offer.

You're wondering where to start - you need a maths professor.

No problem, borrow ours.

Sebastian Van Strien is professor of mathematics at Warwick University, specialising in financial maths.

He is going to show you how.

"Basically it is quite easy to compare credit cards - you have the annual percentage rate (APR)," he says.

To most the numbers are just a blur...
"But the hard bit is there are many add-ons. Different companies have extra premiums and charges that are not always mentioned with the APR.

"And often there are opening offers, where you pay 0% on your balance, but for new purchases you must pay 20%.

"The other thing you have is incentives. Some firms have perks such as air miles or cashback.

"It's a kind of maze of different issues."

So how do you compare? Get a pen and the scientific calculator you thought you'd never see again.

The science part

Right. Leave the APR. And the incentives. You need the flexibility of the monthly interest rate.

Let's assume that you don't pay off the card balance but maintain a basic average debt over the year of 1,500 - and have the garden furniture to prove it. We'll say the monthly interest is 1%.

  • You need to calculate 1.01 to the power of 12. The .01 represents the 1% interest, while 12 is the number of months.

  • Before you ask, you type 1.01, press the "x^y" key, then 12, and finally the equal sign.

  • That will give you a figure of 1.1268. Ignore the 1 - the year's interest will be 12.68%.

  • To calculate 12.68% of 1,500, divide 1,500 by 100 and multiply by 12.68. The result is 190.20 interest.

Now how does that compare with a new card that offers no interest for three months, then 2% per month thereafter?

Sounds similar? Well, 1.02 to the power of 9 is... 1.1951. So that first year's interest would be 19.51% - a whopping 292.65 - and much more the second year.

If you have two parts of your debt calculated at different rates as part of a new offer, you would need to calculate each part separately, using the same formula, and add them together.

Albert Einstein
But not everyone finds compound interest difficult
You might end up with a piece of paper that would make Einstein proud, but you've got a pretty useable guide to battle the banks with.

Or perhaps by now you don't want a card at all anymore.

Professor Van Strien warns: "If you use it just to make small purchases then the perks are more important.

"But if you need to pay big amounts then the decision really becomes a big issue. It is maybe better and cheaper then to put it on your mortgage, or get a personal loan.

"If you wanted to be really clever you could change every six months and take advantage of the deals.

"But you really have to know you can pay it off before the rate goes up."

See also:

20 Feb 02 | Business
01 Jul 02 | UK
20 Jun 02 | Working Lunch
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