How to Calculate Daily Compound Interest

There are many different ways to calculate interest rates. Credit cards typically calculate an interest charge at the end of a 30-day period. Higher interest expenses can result with interest being compounded on a more frequent basis, though. Loans with a daily compounded interest rate can quickly build up a balance, exceeding the original amount due in less than a month's time in interest fees owed alone. Paying off a debt with a daily compounded interest rate should have a higher priority than paying off traditional credit card debts, in order to save you money.

Instructions

1. Determine the interest percentage that was agreed upon as the daily compounded interest rate. This should be in writing when dealing with a debt that will be repaid and has an interest rate calculated on a daily basis for any balance that has not been paid. Convert this daily compound interest rate to a decimal number. This is done by dividing the percentage by 100.

2. Determine the amount of money that is owed at the end of the 24-hour period that ends the day as agreed upon when establishing the line of credit. This includes any previously unpaid amount from the previous month plus any additional money that was borrowed on the current day, adding to the balance of the loan.

3. Add 1 to the decimal equivalent to the number that you calculated in Step 1 for the daily compound interest rate.

4. Multiply the unpaid balance by the number you calculated in Step 3. This now tells you your new balance owed on your debt based on the compounded interest for that date using the agreed upon daily compounded interest rate.

5. Calculate the amount in Step 4 for each day until the loan is paid off. Deductions from the previous day's total after the interest was compounded should be made for any payments that were made that day, before calculating the new balance based on the compound interest rate.

Tips & Warnings

• Compounding an interest rate can increase your debt quickly. As an example, take $50 with a 10 percent daily compounded interest rate. With no payments made the first interest charge is $5, without any additional payments the interest on the second day would be $5.50 cents, and $6.05 on the third day. In three days, your balance could go up $17, which is 34 percent, if you fail to make a payment.

• Try to seek other forms of debt funding before accepting daily compounded interest when possible, to limit your expenses.