How to Calculate Credit Card Interest Rates

Every credit card company has their own policy, whether the interest rate varies daily or if it is fixed, but these approximations will help you estimate the monthly finance charge on your credit cards.

*Some numbers below are rounded up.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Credit Card APR
• Calculator

1. A bad credit score, carrying high balances, or missing payments are reasons a credit card company will raise an APR. There is very little regulation on an APR though. Companies suffering in tight economic times can raise APR on all card holders, without reason, to cover their losses.

2. Annual Percentage Rate (APR) is the rate of fees being charged against your balance. It is good to estimate the monthly fees to improve your budget and to avoid overages, which will incur more fees.
   
   Divide the APR by 365 days. So if the APR is 13.5%, on the calculator enter 0.135/365 = 0.000369. This is your daily interest rate.

3. Multiply the daily rate, 0.000369, by the number of days in the billing cycle.
   
   0.000369 x 30 = .01107

4. Now multiply the solution (.01107) by the balance on your credit account remaining at the end of the billing cycle. For practice let's say you have one card with a balance of $40, and one with a balance of $350.
   
   .01107 x 40 = .4428
   $40.44 will be your balance at the beginning of the next cycle.
   
   .01107 x 350 = 3.8745, new balance $353.87
   
   If the limit on your account was $350, the finance charges would put you over your limit. This will incur an additional over-balance fee, as well as adversely affect your credit history.

5. If you only pay the minimum payment on your credit card each month, you might not even be covering the interest fees. Here are two examples where the first card holder pays only the minimum payment and the other card holder pays a bit more.
   
   Starting Balance: $750. Minimum payment required $35. APR 18% (0.000493/cycle day or use 1.01479 to calculate the balance + monthly interest accrued).

6. Paying the minimum
   Month 1: $750-$25 payment = 725; 725 x 1.01479 = 735.72 new balance
   Month 2: $735.72 - $25 payment = 710.72; 710.72 x 1.01479 = 721.23
   Month 3: $721.23 - $25 = 696.23; 696.23 x 1.01479 = 706.53
   Month 4: $706.53 - $25 = 681.53; 681.53 x 1.01479 = 691.61
   *You've spent $100, but only decreased your balance by $58.39
   
   Vs. paying a little above the minimum
   Month 1: $750 - 35 = 715; 715 x 1.01479 = 725.57
   Month 2: $725.57 - 35 = 690.57; 690.57 x 1.01479 = 700.78
   Month 3: $700.78 - 30 = 670.78; 670.78 x 1.01479 = 680.70
   *You've spent $100 and decreased your debt by 69.30, saving yourself about $10 in finance charges.

7. Why is high interest so dangerous? Here are two examples with the same starting balance of $1500 but different interest rates. They both are paying above their minimum, but the person with the higher interest rate (26%) is making larger payments.
   
   26% (1.0214)
   Month 1: 1500 - 50 = 1450 x 1.0214 = 1481.03
   Month 2: 1481.03 - 50 = 1431.03 x 1.0214 = 1461.65
   Month 3: 1461.65 - 50 = 1411.65 x 1.0214 = 1441.86
   *Paying $150 total, debt has only decreased by $58.14
   
   12% (1.0099)
   Month 1: 1500 - 35 = 1465 x 1.0099 = 1479.50
   Month 2: 1479.50 - 35 = 1444.50 x 1.0099 = 1458.80
   Month 3: 1458.80 - 35 = 1423.80 x 1.0099 = 1437.90
   *Paying only $105, because of the lower interest rate, debt has decreased by $62.10.

8. View more of my tips to understanding and decreasing debt in the additional resources listed below.

Tips & Warnings

• Check your math by looking at a past billing cycle. Do your calculations and see if they are in line with the interest you were actually charged.
• Interest rates can vary a bit from month to month. If you are using this as a way to stay under your credit limit, use the highest 12 month rate for your calculations as a precaution.
• These calculations are based on a credit account that uses average daily balance. Basically, you aren't charged interest on a balance if you pay it off in the same billing cycle, and interest doesn't accrue until the start of the new cycle.
• If your credit card interest is based on two-cycle billing, interest is charged daily starting the day of the purchase. These calculations won't work. But if you did the math you would find that two-cycle billing is a costly contract even for those who pay their balance in full each month!

Resources

• A Quicker way to pay Credit Card Debt
• Reduce Personal Debt
• Budgeting when Broke
• Reduce Credit Card Debt

[rocky5]

on 11/13/2009 Thanks for the catch! I've edited step 3 with the correction.

[ssrail]

on 11/12/2009 How to Reduce Credit Card Debt - Error in line 3 reads Multiply the daily rate, 0.000369, by the number of days in the billing cycle.

(0.00369 x 30 = .01107)this line should read 0.000369 x 30 = .01107

just thought you would like to know...