how to Calculate Credit Card Interest Payment

The more people understand about how credit card companies compute interest payments, the more motivated they will be to pay off their credit cards. By using a little basic math it's easy to calculate a credit card interest payment. Most credit card companies calculate credit card interest payments using an average daily balance formula for each month's interest payment. The average daily balance method may sound intimidating and may seem like a complex math formula, but it's really quite easy. To calculate a credit card interest payment, follow the steps below.

Instructions

1. Begin to calculate a credit card interest payment by perusing your credit card statement for the annual percentage rate. The annual percentage will be listed on the statement, and it will usually be between 7.99 precent and 29.99 precent. The interest rate could be less, or it could be more.

2. Find the average daily balance by looking at the credit card statement, or calculate the average daily balance yourself. To calculate the average daily balance, add the balance for each day noted on the statement and divide the total by the number of days stated on the statement's billing statement. For example, if the daily balances total $3,000, the average daily balance for a thirty day billing cycle would be $100.

3. To calculate a credit card interest payment, take the annual percentage rate, and divide it by 12. The answer is the monthly interest rate or periodic interest rate. If the interest rate were 12 percent, the monthly rate would be 1 percent. Multiply the average daily balance by the monthly interest rate. If the average daily balance were $100 and the monthly interest rate were 1 percent, the calculated interest payment for the month would be $1.00.

4. If you paid off last month's bill in full, ask your creditor if there is an interest-free grace period before you calculate a credit card interest payment. Some creditors will not charge daily interest payments for a certain amount of days, if the previous balance were paid off in full. If there is an interest-free grace period, calculate the credit card interest payment for the days the balance is subject to interest fees by using the same formula above in step 2; however, calculate the number of days in the billing cycle and the credit card average daily balance for the days when you are charged interest.

5. To calculate a daily credit card interest payment, divide the annual percentage rate by 365. For example, if the annual percentage rate were 12 percent, divide 12 percent by 365. Twelve percent divided by 365 equals .0328, which is the daily interest rate. Multiplying the average daily balance by the daily interest rate will calculate the total interest payment for each day. Multiply the total number of days you were charged interest with the total daily interest charge to calculate the credit card interest payment.

Tips & Warnings

• Check statements for minimum interest fees. Many credit card companies charge a minimum interest payment each month, so even if your interest payment is low, you may be charged a higher interest fee.

Resources

• Bankrate.com
• Federal Reserve Board - Finance Charge Calculations