How to Calculate Credit Card Interest With Varying Rates

Knowing the interest charged on your balance better enables debt management.

Calculating credit card interest is key to knowing the true cost of a credit card purchase. A credit card charging interest based on varying rates uses two numbers upon which to base the interest rate you actually pay. The first is the variable portion of your interest rate, usually based on the prime interest rate. The second is a stable fixed rate added to the prime. Knowing the two numbers, you can calculate your actual rate of interest for a billing period.

Things You'll Need

• Credit card statement
• Prime interest rate
• Calculator

Instructions

1. Locate the fixed rate of interest applied to your balance on your credit card statement. This portion of the interest charged does not vary.

2. Find the prime rate of interest at the billing date. Locate the prime rate in the financial section of your newspaper or online at any major financial website such as CNN Money, MSN Money, or Yahoo! Finance. The prime rate is the interest banks charge to their most creditworthy customers and is the lowest interest rate available. It usually changes when the Federal Reserve sets the Fed Funds Rate, which is the rate charged by banks loaning money to each other.

3. Add the prime rate and the fixed rate to get your actual interest rate, the rate the credit card company uses to calculate your interest on billing date.

4. Figure the average balance for the billing period by adding the daily balances for the billing period and then dividing that amount by the number of days during the billing period. The billing period is typically one month long.

5. Take the interest rate and divide it by 365 to find the daily rate of interest.

6. Multiply the average balance by the daily rate of interest. Multiply this result by the number of days in the billing period to determine the interest charged during the billing period.

Tips & Warnings

• Different credit cards may base the variable portion on other market indicators. Check your credit card contract and make adjustments accordingly.

References

• Investopedia: Variable Interest Rate
• Money Café: Prime Rate
• Ask Mr. Credit Card: How to Calculate the Effective Interest Rate on Your Credit Card?

Resources

• Credit Cards: Variable Interest Rate Cards Replacing Fixed Rates