How to Calculate Your Credit Card Interest?
Understanding how credit card interest is calculated is important if you want to be more educated and use your credit card more effectively. Here we’ll explain how most credit card issuers calculate your interest payments and how your individual rate is determined.
For a start, let’s remember some basics about credit card interest: if you pay off the entire card balance each month, then you will not pay any interest. However, it is reasonable to be aware of your interest rates and whether those rates are fixed or variable. Variable interest rates change and banks should notify cardholders before raising rates. Interest rate is also known as an annual percentage rate (APR) and for most people falls between 12.99% and 29.99%. The majority of credit card companies use a daily interest rate and an average daily balance method to calculate interest charges. This means that your interest is compounded based on your daily balance.
Now we figure out how much interest you actually owe. As an example, let’s say your last statement balance was $1,000, and your APR is 22%.
1. Calculate your periodic interest rate
As you already know, you don’t get charged interest on your balance once a year. Actually, your interest compounds daily. This means that a little bit of interest is added every day your balance is unpaid. To find out your daily rate divide your APR by 365. In our example, that’s 0.06%. This is the periodic interest rate (or daily periodic rate) which compounds every day.
2. Determine your average daily balance
The amount of interest owed increases with every day you don’t pay your balance. However, it is worth paying off some of your balance early because a bank will look at your average daily balance. For example, you don’t pay off your above mentioned $1,000 for the first 10 days that it accrues interest. On day 11, you pay off $600. Your average daily balance is (10x$1,000 + 20x$600)/30 = $733. So, the longer you wait to pay off your balance, the more interest you’ll accrue.
3. Calculate interest charge
Now you only need to multiply your average daily balance by your periodic interest rate, and multiply that by the number of days in the month to figure out your interest charge for the next month: $733 x 0.06% x 30 = $13.2.
Keep in mind that your interest is charged from the date of purchase, not from the beginning of the next month. There is no grace period unless you pay off your card balance in full by the end of the period, in which case the interest charges are waived.
Latest Low APR Credit Card News
Finally, there is a credit card specifically designed for Generation Z which is to meet the needs of today’s youth. Meet a new no-annual-fee credit card with rewards – the X1 Card. The offer is described as “the smartest credit card ever made.” But what is so smart about it? Let’s figure it out. The […]
Good news for those who were considering applying for a secured credit card! Capital Bank rolled out a new beneficial offer for its OpenSky® Secured Visa® Credit Card. Now new applicants can count on a 0% intro APR for the N/A. “We decided to build this initiative to help anyone who is impacted by financial strains due to Covid,” […]
The new year brought holders of the Chase Sapphire Reserve card sad news about an annual fee increase from $450 to $550. Still, this is not a cause for frustration, since the new year also means new perks! This week, Chase introduced a couple of nice benefits for holders of select credit cards, including the […]
At the beginning of September, Stripe, a San Francisco, CA technology company developing software to make and receive payments over the Internet, announced the launch of their new card for businesses. Now the Stripe Corporate Card is open to US-based companies. The Stripe Corporate Card is a Visa card issued by Celtic Bank. According to […]
This week Amazon in cooperation with Synchrony Bank came out with their new Amazon Credit Builder credit card. It is not difficult to guess that the card is aimed at people who need to build or rebuild their credit. So, what is offered to them and is it really worthwhile?