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To calculate credit card interest:
When looking at your credit card bill, you may notice a few additions to your monthly payment. If you don’t pay your credit card balance in full by the due date, you will incur interest fees.
You might cringe at the thought of credit card interest, but don’t worry—interest rates aren’t necessarily a bad thing. Understanding credit card interest can help you use your credit card effectively and make smart financial decisions in the future.
Before you sign on the dotted line, take the time to learn how credit card interest is calculated.
Annual percentage rate (APR) is your credit card’s interest rate, or the interest you pay in a given year. The APR for your specific card can be complicated, but every APR operates under two basic principles.
First, you can avoid paying an APR if you pay off your credit card bill in full. In other words, when you completely pay off your credit card balance every month, your card’s APR won’t be applied. But when you carry a balance over to the next month, interest will start to collect on your credit card.
The second principle is that the lower your card’s APR, the lower your interest. APRs vary depending on the credit card company and your credit score.
Remember that your APR doesn’t include compound interest, or the interest that collects on both your current balance and your accumulated interest from that balance. The interest that includes compound interest is referred to as your annual percentage yield (APY).
What Is a Variable APR vs. a Fixed-Rate APR?
There are two types of APRs—variable and fixed-rate:
Most credit cards offer variable rates.
Now that you have a basic understanding of APR, there are a few other types of APRs you should know about. Most credit cards have more than one APR, so you’ll have to read the fine print to see how many your card has. It could include one or more of the following:
Daily periodic rate (DPR) is another type of interest rate. Your daily periodic rate is the formula used to determine how much interest you pay on your credit card on each monthly statement.
In simpler terms, your DPR is your APR divided by 365 (the number of days in a year). And like APR, your DPR does not include compound interest.
So, how is credit card interest calculated? Follow the step-by-step instructions below to calculate yours. Make sure you have your credit card statement available so you can pull the necessary information from it.
To calculate credit card interest, you must first convert your card’s annual rate to a daily rate. To do so, divide your card’s APR by 365 (since there are 365 days in a year).
APR ÷ 365 = DPR
For example, if your card has a 19% APR, the formula would be:
0.19 ÷ 365 = 0.000521%
You can find your card’s APR on your monthly statement.
Since interest compounds daily, you need to calculate your average daily balance.
Look at your credit card statement and note each day’s balance, including any unpaid balances from the previous month.
Add the daily balances and divide by the number of days in the billing cycle.
(Day one balance + day two balance + day three balance, etc.) ÷ Number of days in the billing cycle
For the sake of this example, let’s say you didn’t carry over a balance and only made three charges throughout the month—a $300 charge on day seven, a $10 charge on day 10, and an $800 charge on day 22. Let’s also assume your credit card has a 30-day billing cycle.
In this case, the calculation would be:
($0 x 6 days) + ($300 x 3 days) + ($310 x 12 days) + ($1,110 x 9 days) ÷ 30 = $487
Now, we’ll use the above numbers to calculate our credit card interest. First, multiply your daily rate by your average daily balance, and then multiply that result by the number of days in the billing period.
DPR x Average daily balance x Number of days in the billing period = Daily interest charges
Based on the example above, that would look like:
0.000521 x $487 x 30 = $7.61
While $7.61 may not seem like much, it can add up over time, especially if you spend a lot using your credit card. For example, if you had an average daily balance of $12,000, that would equal $187.56 in interest.
Credit cards carry more than just interest fees. You can’t avoid most fees, but they vary, so don’t be afraid to shop around before settling on a card. You can expect to pay these common fees:
After learning about credit card interest rates, you might be wondering how to keep your credit card interest at a minimum. Here are some ways to pay less interest on your credit card:
Most credit cards calculate interest on a daily basis; however, interest is only applied if you carry a balance from month to month.
The average credit card interest rate is 20.92%, according to data collected by the Federal Reserve.
The lower the APR, the better. If you have a good credit score, depending on other qualifying factors, you may be able to qualify for lower rates.
A grace period is the time allowed for you to pay new charges. It typically runs from the end of a billing cycle to the next due date, around 21 days. Keep in mind that card issuers aren’t required to offer you a grace period, and some only offer the grace period if you pay off your entire balance each month.
To lower your credit card interest rate, improve your credit score, then contact your issuers to see if you can negotiate a lower rate.
Carrying a balance on your credit card will likely hurt your credit score. Credit utilization, or the amount of credit you’re using at a given time, accounts for 30% of your score. A lower credit utilization ratio shows that you’re managing your credit responsibly and not overspending. Most credit experts recommend keeping your credit utilization ratio under 30%, but the lower the better.
Need help staying on top of your credit so you can pay less interest in the future? ExtraCredit® provides you with top-notch credit coverage at an affordable price. Try it with our free trial today.
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