How to calculate your credit card interest to figure out exactly how much your unpaid balances will cost you

Cheryl Lock

Jul 12, 2019, 19:21 IST

How to calculate your credit card interest to figure out exactly how much your unpaid balances will cost you

Thomas Barwick / Getty Images

If you don't pay your credit card balance in full, you'll need to pay interest.

Your interest rate is the amount your credit card charges you to borrow money.
If you pay your credit card balance in full and on time, you generally don't need to worry much about your interest rate, which is expressed as an annual percentage rate (APR).
However, if you're carrying an unpaid balance on your credit card, you're paying a little interest every day, which you'll see on your monthly bill.
While you'll want to check with your bank before running your own calculations, many credit card issuers use the average daily balance method of calculating interest.
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When it comes to credit cards, understanding your interest rate and how it works can be the difference between staying out of debt with an excellent credit score and falling behind in your payments and dipping to sub-par credit score ratings.

Your interest rate is the amount your credit card charges you to borrow money. If you pay your credit card balance in full and on time, you generally don't need to worry much about your interest rate, which is expressed as an annual percentage rate (APR).

But if you're carrying a balance on your credit card, you'll notice you owe more over time, and that's because of the interest rate. Credit cards are notorious for being one of the most expensive types of consumer debt, with an average interest rate of about 17%.

While in most cases you probably don't need to calculate your credit card card interest rate - your statements should clearly reflect how much interest is owed on any unpaid balance and your APR should be clear on your statement and your bank's website - you may want to get an idea of how much your balance is costing you on a day-to-day basis.

Here's a quick cheat sheet to help you when it comes to calculating your own credit card interest rate.

How to calculate credit card interest

1. Pull up your credit card information

Log on to your financial institution's website or pull out your latest statement (if you haven't switched to paperless billing yet, get on that!) to find the pertinent information you'll need to calculate your credit card interest.

You'll need to find:

your purchase APR
the number of days in your billing cycle

2. Get to know the terms

The way your credit card works boils down to a few different terms, two of which include annual percentage rate (APR) and, more generally, your interest rate.

Although APR stands for annual percentage rate, your credit card company uses this percentage number to determine the interest you'll be charged each month when you don't pay your credit card off in full and carry a balance.

Keep in mind that your credit card may have different types of APR, like a:

purchase APR (usually applied to the overall purchases you make with a card),
balance transfer APR (usually applied to any balances transferred from another credit card)
introductory APR (usually applied to purchases made during the promotional period after opening a new credit card)

3. Find your purchase APR

In order to calculate the interest you owe on any leftover balances on your credit card, you'll need to find your purchase APR. If you can't find this information readily, try calling your bank, or click on your card's terms and conditions section.

4. Determine your average daily balance (or balance subject to interest)

This is the aggregate total of what you spent and either paid off and/or were refunded every day throughout your billing cycle, divided by the number of days in your billing cycle.

If you've always paid your purchases in full by the due date, you won't have any interest payments to make and your average daily balance isn't really a factor. However, if you plan to carry a balance, to calculate your average daily balance when you need to determine interest, log onto your bank account online and track the charges and credits that went through on each individual day, creating a rolling total as you move through the days of your billing cycle.

This will provide you with an aggregate total that you can then divide by the number of days in your billing cycle (which you'll find in step five).

5. Get the number of days in your billing cycle

Different credit cards have different amounts of time between billing cycles. A typical credit card statement is paid out in 30-day billing cycles.

6. Divide your APR by 365

Since your APR is your annual interest rate, you'll need to divide your APR by the number of days in the year to get your daily interest rate. So for example, an APR of 13.99% would become: 0.1399/365 = .00038 daily interest.

7. Multiply your daily rate by your average daily balance

Once you know what you're charged daily for interest, you can multiply that number by your average daily balance to find the daily interest you'll owe. So for example, if your leftover balance after paying your credit card is $1,000, you would get: .00038 x $1,000 = $0.38

8. Multiply your daily interest rate by the number of days in your billing cycle

If you determined that you have a 30-day billing cycle, then the credit card interest you would owe on a balance for the 30-day cycle in this example would be: $0.38 x 30 days = $11.50 in interest

9. Ask about your credit card's grace period allowance

Some credit cards offer a grace period between when items are purchased and when they absolutely need to be paid off before accruing interest. Check in with your bank to learn if you have a grace period on your accounts and what the exact grace period is in order to better avoid paying interest.