How Do You Calculate the Daily Interest on a Credit Card?
Whenever you use a credit card to make a purchase or get a cash advance, you borrow money from the credit card company. The credit card company charges you interest that can be calculated in several different ways. Some credit cards come with a "grace period," meaning if you pay for purchases within a short time, there are no interest charges. Otherwise, interest will be calculated and added to the balance you owe.
Other People Are Reading
-
Average Daily Balance
-
Before you can calculate interest on a credit card, you have to figure the balance using the method your credit card company uses. By law, the terms of your credit card must state the method used. The most common system is the average daily balance method. For each day of the billing cycle, subtract any credits from the previous day's balance. For some credit cards you add any charges for the day. Other credit cards don't add charges until the end of the billing cycle. At the end of the billing cycle, add up the daily balances and divide the total by the number of days in the billing cycle to find the average daily balance.
Other Methods
-
If your credit card company doesn't use the average daily balance, it's very likely it uses either the adjusted balance or two-cycle method. The adjusted balance method produces a lower balance, so it works to your benefit. Payments and credits are deducted from the previous billing cycle balance. Your interest charge is figured off of the result. Charges aren't added until after interest is calculated. By contrast, the two-cycle method bases interest charges on the average daily balance for two billing cycles and results in higher interest charges.
-
Daily Interest
-
Interest on credit cards may be calculated on a daily basis or per billing cycle. To calculate daily interest on a credit card, first compute your daily periodic rate by dividing the card's annual percentage rate (APR) by 365. For example, if the APR is 14.6 percent, the daily interest percentage equals 0.04 percent. Multiply the daily interest percentage by the average daily balance to find the daily interest charge. Multiply the daily interest charge by the number of days in the billing cycle to find the total interest charged for the billing cycle.
Monthly Interest
-
In reality, credit card companies are more likely to figure interest charges once per month (or billing cycle). If that's the case with your credit card, divide the APR by 12 to find the monthly interest percentage. Suppose your APR is 19.2 percent. The monthly percentage rate works out to 1.6 percent. Simply multiply the monthly percentage rate by the average daily balance to find your interest charges for the month (or billing cycle). If you want to know the daily amount of interest on the credit card, divide the interest charges by the number of days in the billing cycle.
-
