How to Calculate Credit Card Interest

Calculating credit card interest

The costs associated with credit card interest can break your budget, much like the cost of gas. Credit card interest may be a mystery to many consumers who don't understand how the interest is actually calculated. Once you understand how credit card interest is determined, this may motivate you to stop using your credit card as often. T

Difficulty:

Moderately Easy

Instructions

Things You'll Need

• Calculator
• Credit card statement

1. Look at your credit card statement for this month and find out whether you had a balance the previous month. If your balance was zero, there will no credit card interest on the purchases you made this month.

2. Find out what interest rate your credit card is charging per year. This should be notated on your credit card statement. You may have 23.99 percent or 16.5 percent annual interest.

3. Determine the system your credit card company uses for calculating interest charges. Most credit card companies use an average daily balance method, where interest accrues daily.

4. Figure out your average daily balance for the month. Add up the balance for each day of the month, and then divide by the number of days in the month. This will give you the average daily balance.

5. Determine the amount of interest that is charged to you each day of the month. Take the annual percentage rate of interest and divide it by 365. This gives you what is called the periodic rate, or daily rate of interest.

6. Do the credit card interest calculation. Take the average daily balance and multiply it by the periodic rate. Then, multiply this number times the number of days in the month. You will now have the amount of your interest for the month.

7. Look at your credit card statement to make things easier on yourself. Instead of trying to determine the average daily balance yourself, you should see an amount that says "balances subject to finance charge." This amount goes into the spot for the average daily balance in your calculation. The statement should then note the "periodic rate." This goes in the spot for the periodic rate in the calculation.

8. Do some multiplication. To determine the finance charge using the statement, you take the 'balance subject to finance charge,' and multiply times the 'periodic rate.' Then, multiply this number times the number of days in the month. You then have your monthly finance charge.

Tips & Warnings

• If you have a high-interest-rate credit card, consider switching the balance to one with a lower rate. Even if you pay a 3 percent transfer fee, you could save money over time.

• Call your credit card company and ask to have any annual fees waived as a courtesy. Often, credit card companies will do this if you just ask.

• Beware that if you don't pay off the balance on your credit card each month, the interest you pay the next month will include new purchases you made during the month. This means you won't have a chance to pay off the new shoes you bought this month before interest accrues on the charges.

• Realize that there are some credit cards that do not give you a full month grace period before interest starts to accrue. If this is the case, determine the average daily balance for the accrual time, and multiply times the periodic rate. Then multiply this number times the number of days in the month where interest accrues.

References

• Ask Mr. Credit Card: How to Calculate the Effective Interest Rate on Your Credit Card?

Resources

• Read this Article in Spanish
• University of Maryland: How Does Your Credit Card Calculate Interest?