Enter the total credit amount ($), the credit rate (%), and the credit period (years) into the Credit Cost Calculator. The calculator will evaluate and display the Credit Cost (simple interest for the period).
Credit Cost Formula
The following formula is used to calculate the Credit Cost as simple interest over a specified period (it does not model compounding or loan payments).
CC = A * (CR/100) * T
- Where CC is the Credit Cost ($)
- A is the total credit amount ($)
- CR is the credit rate (% per year)
- T is the credit period (years)
To calculate the credit cost (simple interest), multiply the credit amount by the annual credit rate (as a decimal) and by the credit period in years.
How to Calculate Credit Cost?
The following example problems outline how to calculate Credit Cost (simple interest).
Example Problem #1:
- First, determine the total credit amount ($). The total credit amount ($) is given as 13,000.
- Next, determine the credit rate (% per year). The credit rate is provided as 5.
- Next, determine the credit period (years). Assume the period is 1 year.
- Finally, calculate the Credit Cost using the equation above:
CC = A * (CR/100) * T
The values given above are inserted into the equation below:
CC = 13,000 * (5/100) * 1 = 650 ($)
FAQ
What is a credit rate and how does it affect the cost of credit?
The credit rate is the interest rate charged on the amount borrowed, usually expressed as a percentage per year (APR). It affects the cost of credit because, for a given balance, a higher rate produces more interest over the same time period, while a lower rate produces less.
Can the credit cost change over time?
Yes. If the credit rate is variable (not fixed), the interest charged for a given period can change as the rate changes. Also, for many real loans (with payments), the outstanding balance changes over time, which changes the interest amount even when the rate is fixed. This calculator uses a simple-interest model over the period entered and does not account for payments or compounding.
Are there any additional costs involved in credit besides the credit cost calculated using the formula?
Yes. Depending on the credit product, there may be other charges not included in the simple interest calculation, such as origination fees, annual fees, administrative fees, late payment penalties, and other lender charges. Review the full credit agreement to understand total borrowing cost.
