How Is Credit Card Interest Calculated?

Like most people, your credit card probably plays a big part in your finances. If you’ve looked at your recent credit card bill, you might have noticed a few other additions to your monthly payment. Most credit cards have annual fees, transaction charges and more. And all credit cards carry interest rates. Before you sign on the dotted line, take the time to learn how credit card interest is calculated.

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 will help you use your credit card effectively and help you make smart financial decisions in the future.

What Is APR?

Here’s a term you’ve probably heard before—annual percentage rate, or APR. This is your credit card’s interest rate or the amount of interest you pay in a given year. The APR for your specific card can be complicated, but every APR has 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 will be. APR rates vary depending on the credit card company and your credit score.

Remember that your APR doesn’t include compounded interest. This is the interest on both your current balance and your accumulated interest from that balance. In other words, it’s the interest that collects on your credit card balance and your interest. The interest that includes compounded interest is referred to as annual percentage yield (APY).

What Is a Variable APR vs. a Fixed-Rate APR?

There are two types of APRs—variable APR and fixed-rate APR. A variable APR changes with the index interest rate. This means that credit card’s APR could change, although your cardholder agreement determines exactly how often it changes.

A fixed-rate APR card, on the other hand, implies that the rate never changes. But that’s not exactly true. While a fixed-rate APR won’t change along with an index, it can still change. The card issuer is required to give you notice before increasing the rate. It usually changes monthly or quarterly.

Does a Credit Card Have More Than One APR?

Now that you have a basic understanding of APR, there are a few other 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 of the following percentage rates:

  • Balance Transfer APR: This interest rate is charged to any balances you transfer to the card from other credit cards.
  • Cash Advance APR: A cash advance interest rate is often very high and charged on any credit card cash advance you take out.
  • Penalty APR: If you want to dodge paying penalty interest, make sure to pay your balance on time to avoid late payments.
  • Purchase APR: This interest rate is charged to items you buy with your card.
  • Intro APR: This is a promotional APR that lasts for a certain period of time. It isn’t unusual fora credit card company to offer new cardholders a 0% intro APR for the first year or so.

How Can I Tell if My APR Is a Good Rate?

A good APR is a lower rate. Basically, the higher your credit card’s APR, the more you’ll pay on your credit card. So, when you’re hunting for a credit card, try to choose one with a low APR. This is especially important if you plan on using the card for expensive purchases that you’ll pay off over several months. Also keep in mind that the higher your credit score, the better APR offers you’ll receive.

What Is DPR?

Much like APR, DPR is another interest rate. While APR stands for annual percentage rate, your DPR is the daily periodic rate. Your daily periodic rate is the formula used to figure out how much interest you pay on your credit card on each monthly statement.

In simplest terms, the DPR is your APR divided by 365 (the number of days in a year). The DPR is then multiplied by your average account balance per day and then the number of days in your billing cycle. And like APR, your DPR does not include compound interest.

Calculating Average Daily Balance

Imagine your credit card’s APR is 20%. Divide that by 365 and your DPR is .054%. Next, imagine you charged $600 and your billing cycle is 30 days. Multiply your average daily charge ($600) by your DPR (.00054%) by the number of days in your billing cycle (30). This means you’ll pay $9.72 in interest for the month.

What Other Fees Do Credit Cards Carry?

Credit cards carry more than your interest fees. You can’t avoid most fees, but they vary by card. Don’t be afraid to shop around before settling on a card. You can expect to find these common fees:

  • Annual Fee: Many cards charge an annual fee, although they often usually include benefits that make the card worth the cost of the annual fee.
  • Balance Transfer Fee: If you choose to transfer balances between cards, you may need to pay a fee to do so.
  • Cash Advance or Withdrawal Fee: If you decide to take cash off your credit card, expect to pay a fee, likely one that costs more than withdrawing from a traditional bank ATM.
  • Foreign Transaction Fee: If you purchase an item in a foreign currency, your credit card may charge you a fee.
  • Late Payment Fee: This fee is common among all types of financial transactions but may cost more on a credit card. Avoid this fee by paying your bill on or before the due date each month.

How Can You Stop Carrying a Credit Card Balance?

One of the worst things you can do when it comes to credit card debt is to only pay the minimum payment and never get your balance down. Luckily, there are a few ways you could get your balance down. Start by transferring the ones you can. When you can, transfer them to a card with a 0% interest rate, so that anything you pay is toward your debt and not interest.

If you can’t find a 0% interest rate, payoff the cards with the highest interest rates first. If you’re the type who needs to see faster results to keep your momentum going, you can choose to pay off the card with the lowest balance first instead. As a last resort, you may want to consider a debt consolidation loan if you feel like you are drowning in credit card debt.

What Is a Grace Period?

It’s not unusual for a credit card issuer to offer users a grace period. The grace period is the time allowed for you to pay new charges. It usually runs from the end of a billing cycle to the next due date.

A grace period usually lasts around 21 days. Keep in mind that a company isn’t required to offer you a grace period. Some companies only offer the grace period if you pay off the entire balance each month.

Keep Your Credit Card Interest Down

After learning about credit card interest rates, you might be wondering how you can keep your credit card interest at a minimum. The easiest way to save money is to only use your credit card when you absolutely need to. When you do use your credit card, payoff the balance as soon as it’s due. Try to avoid making partial payments.

Are you having difficulty keeping your credit card expenses, and therefore interest, in under control? Check out to learn more about credit cards and how they affect your finances.

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