How to Calculate Credit Card Interest

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Saving money on your credit card bills is easy, if you understand how the banks calculate interest. Looking at your statement can be downright confusing, so we did our best to simplify it. Let’s take a look at how we can beat the banks at their interest game:

Important credit card terms

Calculating your credit card interest is actually a fairly simple process with only a few moving parts. Important terms to understand are annual percentage rate (APR), average daily balance, and daily interest rate, which is usually noted as periodic interest rate.

Figure out your periodic or daily interest rate

Because credit cards charge interest on a daily basis, you need to convert your APR to the daily rate to correctly figure out your interest owed. To do this, you simply divide by 365 (be aware that some banks do use 360 or some other number). This gives you your periodic or daily interest rate. For instance, an 18 percent APR equates to .049 percent. While this number seems miniscule, it does add up over time.

Calculate average daily balance for this period

Take a look at your statement and the charges and payments made on it over the course of a month. The amount of interest charged will depend on your account’s balance, which is the amount that you did not pay last month.

Let’s say your unpaid balance was \$500 last month, but you paid \$100 halfway through the month, and then charged \$50 on your card the last day before your new statement. The calculation looks like this: ((15 X \$500) + (14 X 400) + (1 X \$450)) / 30 = \$451.66.  In this instance, the \$451.66 is your average daily balance. Now, if you’d paid \$100 on the day after your statement, this figure would lower, as would your interest charge.

Multiply average daily balance by daily interest rate

The simple calculation to figure out your interest charge for the month is average daily balance X daily interest rate X days. So, our calculation for our example above now looks like this:

\$451.66 X .049 X 30= \$6.64, which is the interest you pay for this statement balance.

Save money on your credit cards

Here are a few smart tips we can give you to help save on your credit cards:

• Obviously, keeping your balances low is one; if you need to make a large purchase, do so right before your statement cutoff date to save interest.
• For the best credit score, keep your balance below 1/3 of your credit limit. Some even suggest having a credit utilization ratio of only 10%.
• Another wise idea is to move money to teaser rate credit cards when possible. Many offer 0% rates for transferring your balance, for a limited amount of time.
• Keeping your credit score high means that you will qualify for the lowest rates on credit lines of all types.
• If you’ve managed to raise your credit score since you got your credit cards, call them to see if they will offer you a reduced rate as a loyal and responsible customer.

Think of credit cards as a means to an end. Using them wisely will beef up your credit score, and allow you to qualify for the lowest rates on major purchases like automobiles and home loans.