When applying for a new credit card, most people will pay close attention to several different things. It could be the signup bonus or the rewards they can earn. But the one thing that should always be on your radar is the effective annual percentage rate, or APR, on the card.

On the surface, you might think you have a good understanding about what an APR is and how it’s calculated. However, it can be confusing and you can easily be left uninformed. To help you become a more empowered consumer, we’ll walk you through the basics: When interest is charged on accounts, how the interest is actually calculated, and what can affect the APR you receive.

## When Will Interest Be Charged?

A little-known perk of most credit cards is that they come with a grace period. This is the period of time from when your credit card statement closes to its actual due date. The number of days depends on the card issuer, but it’s typically at least 21 days. With most cards, if you pay your entire statement balance before the grace period ends, then no interest will be charged. However, if you only pay a portion of your balance before the due date, then interest will begin to accrue on the purchases you made. (Remember, credit cards don’t have to offer a grace period so be sure to read the fine print of a card you’re considering to see if it offers one.)

## How Do You Calculate Interest?

If you are carrying a balance on your credit card, you’ll likely see the interest payment on your statement. But do you know how that figure was derived?

To start, it’s important to understand some terminology. We frequently see APR mentioned in credit card terms. Even though this means annual percentage rate, interest is not calculated on an annual basis. It’s actually calculated on a daily basis, which is more commonly known as the periodic interest rate.

So let’s assume your card has an APR of 16%. To figure out what the periodic interest rate would be, you would divide 16 by 365 days (some card issuers use 360). That means your periodic interest rate would be 0.044% per day. You’re probably thinking that doesn’t seem like a lot, but over a month or a year it can really add up, depending on your balance.

Once you know your periodic interest rate, you need to find out what the average daily balance on your card was. Let’s assume that you have a \$2,000 balance at the beginning of the month, and you don’t pay any of it for the first 15 days. Then it’s payday and you are able to pay off \$500 on the 16th. Then you pay off another \$500 on the 25th of the month. That means your daily average balance would be (\$2,000 x 15 + \$1,500 x 9 + \$1,000 x 6) / 30 = \$1,650.

Now that you know what your periodic interest rate would be and you know your daily average balance, you can put them together to figure out what your monthly interest charge would be \$1,650 x 0.044% x 30 = \$21.78.

## What Can Affect Your Credit Card APR?

Most credit cards will state they use a variable APR. This means that the rate can move up and down based on different factors. Some of these factors are directly in your control, while others are controlled by outside influences. Just keep in mind that any rate changes need to be communicated with you 45 days ahead of time, per the CARD Act.

Something that is in your control is your creditworthiness. When you apply for a credit card, the issuer is going to want to make sure you are going to be able to pay back the money you borrow. They also may look at your FICO score, among others. The higher your scores, the lower your APR will be. (Not sure where your finances stand? You can view two of your credit scores for free on Credit.com.)

However, another factor is something called the prime rate. This is defined as the lowest rate of interest at which people may borrow commercially. When the Federal Reserve moves rates (as it did very recently), it can either positively or negatively affect a credit card’s APR. If the Fed raises rates, your APR might go up. If the Fed lowers rates, you APR could go down.

By understanding how your credit card company calculates the interest on your card, you will become a more empowered consumer and have a better appreciation for paying off your statement balance in full each month.

Image: martin-dm

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.