Calculating credit card interest can be tedious, which is why many cardholders are left in the dark about how much they’ll be charged if their balance isn’t paid out by the due date.
However, you can — and frankly, you should — understand how much you’ll owe to avoid paying more than you have to. Below, we break down how to calculate credit card interest to help you figure out how much you’ll owe.
How Is Credit Card Interest Calculated?
There are different methods for calculating credit card interest, but most credit card providers determine how much interest you’ll have to pay by using your daily periodic rate (DPR) and the average daily balance.
A DPR is determined by dividing your annual percentage rate (APR) by 360 or 365 (number of days in the year), depending on your credit card company. Then, your DPR is multiplied by the average daily balance during your billing cycle to calculate your credit card interest.
Step-by-Step Guide on How to Calculate Credit Card Interest
We’ve prepared a step-by-step guide on how to use the above-mentioned method to calculate interest on credit card:
1. Look Up Your APR
Although credit card companies usually refer to the interest rate for credit cards as an annual percentage rate (APR), most lenders compound interest every day. It means that interest is added to your original balance at the end of every day.
So, the first step in calculating interest charges is to determine what your APR is. Typically, you can find your credit card’s APR at the bottom of your monthly statement.
2. Convert Your APR to a Daily Periodic Rate
Once you know your credit card APR, it should be converted to a daily periodic rate to calculate credit card interest. You can determine your DPR by dividing your APR by 360 or 365, where 360 or 365 is the number of days in the year, depending on the lender.
For example, if your APR is 20.99% and your credit card issuer uses a 365-day year for calculation purposes, your daily periodic rate is 0.000575 (0.2099 / 365 = 0.000575).
3. Calculate Your Average Daily Balance
This one is the most difficult part of calculating credit card interest since you need to determine your balance at the end of each day in the billing cycle. For this, you’ll need to look back at your statement.
Start with the unpaid balance carried over from the previous billing cycle. Then, add up the balances from every day in the current billing cycle. A billing cycle is a period between billings for a credit card that usually ranges from 28 to 31 days, depending on the lender and credit card.
For example, let’s say that your billing cycle is 28 days, and you made multiple purchases during the billing cycle. Your credit card balances would look like this:
| Day | Transaction | Balance |
|---|---|---|
| 1 | $40 purchase | $40 |
| 2 | None | $40 |
| 3 | $25 purchase | $65 |
| 4 | $34 purchase | $99 |
| 5 | None | $99 |
| 6 | None | $99 |
| 7 | None | $99 |
| 8 | $90 purchase | $189 |
| 9 | None | $189 |
| 10 | None | $189 |
| 11 | $152 purchase | $341 |
| 12 | None | $341 |
| 13 | $76 purchase | $417 |
| 14 | None | $417 |
| 15 | None | $417 |
| 16 | None | $417 |
| 17 | $82 purchase | $499 |
| 18 | None | $499 |
| 19 | $59 purchase | $558 |
| 20 | $15 purchase | $573 |
| 21 | None | $573 |
| 22 | None | $573 |
| 23 | None | $573 |
| 24 | $211 purchase | $784 |
| 25 | None | $784 |
| 26 | $110 purchase | $894 |
| 27 | None | $894 |
| 28 | None | $894 |
Now, the formula is simple: You need to add the balances from every day in the 28-day billing cycle and divide it by the number of days in the billing cycle.
4. Determine Your Credit Card Interest
Once you know your DPR and ADB, you need to multiply your daily periodic rate (0.000575) by the average daily balance ($412.71). You’ll get roughly $0.24.
The final step in calculating credit card interest is to multiply $0.24 by the number of days in the billing cycle. If you have 28 days in your billing cycle, $0.24 * 28 = $6.72. You will be charged $6.72 in credit card interest for this billing cycle.
Conclusion
As you can see, calculating interest charges is a fairly straightforward process once you understand how it works. It’s important to understand how your credit card company will calculate interest charges on your credit card to avoid being caught off guard.
Frequently Asked Questions (FAQs)
Will I lose the grace period if my credit card isn’t paid out by the due date?
Yes, you will lose the grace period if you don’t pay your balance in full by the due date. If you lose the grace period, you will not only pay interest on the unpaid amount, but also on all new purchases going forward until you pay the full amount.Can my credit card company increase my APR if I’m late on payments?
According to the Credit CARD Act of 2009, your credit card issuer can increase your annual percentage rate to a “penalty APR” when you are more than 60 days late on a payment, and the company sends you a written notice 45 days before changing the rate.