How to Calculate Interest on Credit Card Debt

Credit card interest is pretty simple to calculate. Credit interest is calculated based on the interest rate. The interest rate usually adds up the the annual percentage rate (APR). However, depending on how your credit card company charges you, your balance, and the number of days in the billing cycle, it can actually be lower or higher than the APR.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Credit Card Statement
• Calculator

1. 
    
   Interest Rate Methods

   Credit card companies charge interest different ways. The most common way is using the average daily balance method. Other methods of calculating interest is adjusted balance, and previous balance. Take a look at your credit card statement. Under account summary or rate summary, you should be able to notice what method your credit card company is using.

2. 
    
   Interest Rate

   Let's first calculate your monthly interest rate. Look at your credit card statement and look at the Annual Percentage Rate (APR). Take this number and divide it by 12. For this article, I will use 18% APR as an example. So we will calculate 18/12= 1.5. So for this example, our interest rate is 1.5%. This may show on your credit card statement as Monthly Periodic Rate.

3. 
    
   Interest Charges

   As stated earlier, the most common method of calculating monthly interest is using the average daily balance. This should also be stated on your credit card statement. You can figure out your average daily balance by adding up your daily balances and dividing it by the number of days in that billing cycle. Again, this should all be calculated on your statement for you. For this example, we'll say our average daily balance is $500. To figure out our interest charges, calculate: 500 * 1.5%= 7.50. So for that billing cycle, you interest being charged to you would be $7.50.

4. 
    
   Monthly Payments

   The adjusted balance method is takes into account any payments that you make throughout the billing period. So ultimately, this is the method that charges the lowest finance charges. For example, if your made a $100 payment on your balance of $500 during the billing cycle. Your interest charge would be as follows: 400 * 1.5%= 6. So your interest for that billing cycle would be $6.

5. 
    
   Keep Balance Low

   The previous balance method can be the most costly. This charges you interest, obviously, on your previous balance. Any payments and purchases you make during the current month aren't included in the equation.

Tips & Warnings

• The interest rate clearly makes a huge different on how much you pay each month. Shop around for a lower interest card so you may transfer balances to a lower APR.