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How to calculate credit card interest

5 min read

Credit cards can offer a range of benefits, including rewards, perks, security, and convenience. However, they can also charge high interest rates, threatening your financial security. The good news is that you don't have to worry about credit card interest if you pay your balance on time and in full every month. However, if you regularly carry a balance or might not be able to afford an upcoming payment, it's a good idea to know what to expect.

Credit card companies typically calculate interest daily, which means that accruing interest is compounding. To get started, you'll need to know the following information:

  • Days in your billing cycle: Check your monthly statement to determine the number of days in your most recent billing period.

  • Annual percentage rate: This is the interest rate on your account; it can be found in your original cardholder agreement or on your most recent billing statement.

  • Daily periodic rate: This is your account's effective daily interest rate. To calculate it, divide your APR (in decimal form) by 365.

  • Your average daily balance: This one's a bit more complicated. To get your average daily balance, you'll need to find and list the balance at the end of each day in the billing cycle, then add them all up and divide by the number of days in the billing cycle. If your card issuer compounds interest, you'll need to calculate daily interest using your periodic rate and include the accrued interest for each day.

Once you have all these details, you'll multiply the average daily balance by your daily periodic rate, then multiply that figure by the number of days in your billing period.

Let's say you've reviewed your latest billing statement and obtained the following information:

  • 30 days in the billing cycle

  • 24% APR

  • $3,600 average daily balance

Start by dividing 0.24 [APR %] by 365 [days in a year], giving you a daily periodic rate of 0.000657534246575.

Then, multiply 0.000657534246575 by $3,600, giving you $2.37 in daily interest.

Multiply $2.37 by 30 [days in the billing cycle], and your monthly interest would be roughly $71.01.

Figuring out how to calculate credit card interest is complicated, but getting a handle on the basics can help explain why you're being charged a certain amount.

With that said, there are several other aspects of credit card interest rates to understand as you use your credit card in different ways.

Most credit cards offer variable interest rates, meaning your APR will fluctuate based on market conditions.

When the Wall Street Journal prime rate — often used as a benchmark rate for credit card issuers — increases, your card's interest rate will likely follow suit. The same is also true if the prime rate goes down.

Credit cards usually offer a grace period on your purchases, during which you can pay your balance in full without incurring interest charges.

The period, which must be at least 21 days, runs from your monthly statement date and due date. Some credit card companies even offer extended grace periods. With the Capital One Venture Rewards Credit Card and the Wells Fargo Active Cash? Credit Card, for instance, you'll have at least 25 days.

The grace period doesn't apply to balance transfers or cash advances. You can also lose your grace period if you don't pay your balance on time and in full monthly.

Depending on your card and its use, you may have several different APRs to keep track of:

  • Purchase APR: This rate applies to your purchases and typically comes to mind when you think of credit card interest rates.

  • Balance transfer APR: This rate applies to balances transferred from other credit cards and is usually the same as the purchase APR.

  • Cash advance APR: This rate applies to cash advances and is typically higher than the purchase APR.

  • Penalty APR: If you miss a payment by 60 days, your card issuer may convert your purchase APR to a much higher penalty APR — often up to 29.99%. However, some cards, such as the Discover it? Cash Back and the Citi Simplicity? Card, don't charge a penalty APR.

If you need time to pay off a large purchase or a high-interest balance on another credit card, you may consider a card offering an introductory 0% APR promotion.

With the Wells Fargo Reflect? Card, for instance, you'll get an introductory 0% APR on both purchases and balance transfers for 21 months, after which the variable APR is 18.24%, 24.74%, or 29.99%, depending on your creditworthiness.

The Chase Freedom Unlimited? offers a shorter promotion. For 15 months, you can enjoy a 0% APR on purchases and balance transfers, after which the variable APR ranges from 20.49% to 29.24%. However, this card also offers a welcome bonus and cash-back rewards on every purchase.

Keep in mind, though, that some cards only offer a 0% APR on one of those two categories. For instance, the Citi Double Cash? Card offers a 0% APR on just balance transfers for 18 months, after which the variable APR is 19.24% to 29.24%. If you do transfer a balance, purchases made with the card won't qualify for a grace period until your transferred balance is paid off.

Credit card debt can be expensive, especially if you carry a balance over a long period. Learning how credit card interest rates work and how to calculate credit card interest can help you better understand how your account works. However, it's crucial to prioritize spending within your means and paying your balance on time and in full every month to avoid interest charges altogether.

If you have emergency expenses, need to make a large purchase, or want to pay off high-interest debt on one of your cards, a 0% APR credit card can help you save hundreds of dollars on interest. Before you apply, though, it's important to create a plan to ensure that you pay off most or all of the balance before the promotional period expires.

This article was edited by Rebecca McCracken

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