How is Credit Card Interest (APR) Calculated?

How is Credit Card Interest (APR) Calculated?

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When it comes to credit card basics, the most critical concept to master is how interest is calculated. Most card issuers calculate interest charges using the "average daily balance," meaning that your interest is calculated on a daily basis. By understanding how often your interest is calculated, you'll be able to figure out how much you'll owe.

Even if you don't manually calculate your credit card interest, it's still important to understand how issuers determine your interest charges. At the end, we've added our own interest calculator to ease this process for you. This guide will help you clearly understand each step of the calculation and provide the key terms you should know.

How does credit card interest work?

Credit card interest is applied to your statement if you don't pay your balance in full by the payment date. To find your interest rate, you'll want to look at the annual percentage rate (APR) on your card. There will likely be different APRs depending on the transaction, such as purchases, balance transfers and cash advances. The purchase APR is the most common interest rate, and as the name suggests, the purchase APR is charged on items you buy on your card.

How to calculate credit card interest, step-by-step

Calculating credit card interest can be a complicated process. There are four steps to the calculation, and finding your average daily balance will be the most challenging of them all. It requires you to know exactly what your balance was at the end of each day during the last billing cycle.

Step 1: Figure out how often your credit card interest is compounded

The first step is to figure out how often your credit card interest is compounded — how often the interest is added to your original balance. Most credit card issuers will compound interest daily, though you can find out what your particular issuer uses in the pricing information of your card.

You'll want to look for the line "How We Will Calculate Your Balance." If, for example, the issuer uses a method called "daily balance," this means your interest is compounded daily.

How We Will Calculate Your Balance

Step 2: Divide your card's annual percentage rate (APR) to get the periodic rate

Next, you'll want to find the periodic rate, which helps you understand how much interest you're paying on a balance per period.

If your issuer uses a daily balance, you'll divide the APR by 365 days. If the APR is compounded monthly, divide it by 12 months. For example, an APR of 14.99% compounded daily would have a periodic rate of (14.99% / 365) = 0.00041, or 0.041%. This percentage is your periodic rate, which is the APR divided by the number of periods in your balance.

Periodic rate

APR / number of periods

Step 3: Find your average daily balance

To find your average daily balance, you'll need to know precisely what your end-of-day balance was each day within a billing cycle. This can be the most difficult part of calculating your interest, as your balance may change day-to-day, and can get especially complicated if you use your card frequently. (If you put new charges on your card every day in a month with 31 days, you would have to calculate the end-of-day balance for 31 separate days.)

For example, let's assume you had a $300 balance on your card for the first three days, a $500 balance for the next 15 days and finally up to $1,000 for the last seven days. Your average daily balance would be $616. This number is calculated using the following formula:

Average daily balance

(Day 1 Balance + Day 2 Balance + Day 3 Balance…) / total number of days in the billing cycle

Step 4: Put it all together

Now, you're ready to put everything together. You'll multiply the periodic rate from Step 2 by the average daily balance from Step 3 and the number of days in your billing cycle. The result is the interest accrued by a credit card for a given period.

Most credit cards will have a minimum interest charge. The amount varies by bank, but is generally between $1 and $2. Therefore, if you follow the calculations outlined here and get an interest charge of $0.50, you'll pay the minimum interest charge instead.

Example calculation

To help you visualize this formula, we provided a sample calculation for a card that calculates interest on a daily balance. We assume that this card comes with a 14.99% APR. Here's the card's activity in a given month:

Day
Activity
Balance
1-4None$0
5-10$200 purchase$200
11-13$50 purchase$250
14-18$500 purchase$750
19$400 payment$350
20-25$200 purchase$550
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To calculate the average daily balance, we multiply the number of days by its end-of-day balance.

((4 * $0) + (6 * $200) + (3 * $250) + (5 * $750) + (1 * $350) + (6 * $550)) / 25 days = $374

To calculate interest for the 25-day period, we multiply the average daily balance by the daily periodic rate and the number of days in the billing cycle.

Factor
Calculation
Result
Daily periodic rate14.99% / 3650.041%
Average daily balance((5 * $0) + (6 * $200) + (3 * $250) + (5 * $750) + (1 * $350) + (6 * $550)) / 25 days = $374$374
Number of days in billing cycleDays 1-2525
Interest calculated$374 * 25 * 0.041%$3.83
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To calculate the daily periodic rate, we divide the APR by 365 days (14.99% / 365 = 0.041%.)

Since there are 25 days in the billing cycle, we can now put all of these numbers together. We multiply the average daily balance, daily periodic rate and the number of days in the billing cycle to get the interest charge of $3.83.

What to know about credit card grace periods

If you're looking to avoid credit card debt altogether, issuers will usually offer cardholders a defined period of time to pay off their balance. Throughout this grace period, any new purchases added to the balance will not accrue interest. By paying off your credit card bill within this grace period, you will not be charged any interest whatsoever.

According to the CARD Act of 2009, you have 21 days to pay off your balance before interest starts to accrue. This time applies from the moment your bill is delivered to you, whether by mail or electronically. If your due date falls on a weekend or federal holiday, you’ll have until the following business day at 5 p.m. to submit your payment.

Tools to help you visualize your credit card interest

Now that you understand how credit card interest works, you may want to use an automated tool to help facilitate your calculations. Our credit card interest calculator allows you to add as many credit card balances as you'd like below, along with their interest rates and the type of monthly payments you make. The calculator will show what your total interest payments will be by the time you completely finish paying off your debt.

Credit card interest calculator tool

balance

payment

interest (APR)

payoff time

You will pay a total of $0 in interest over this time.

Visualizing Your Debt Burden

To help you track how quickly your balance will be affected under your current payment plan, we graphed your progress over time below.

Balance
{"onCurrent":"true"}

ValuePenguin's verdict

A common misconception is that the annual percentage rate (APR) means that credit card interest is calculated each year. Instead, most issuers calculate interest daily. Therefore, it's essential to know how much interest you'll accrue if you carry a balance on your card each month.

You can also use any of our tools to calculate these interest charges if you prefer not to calculate these rates manually. Above all, it's key to pay your balance in full each month to avoid interest charges altogether.

Stella Shon

Stella Shon is a travel credit cards writer with ValuePenguin. After studying abroad in Paris three years ago, she became determined to keep traveling. That’s when she discovered the world of points and miles, which enabled her to travel on a student budget. Since then, she’s flown over 150,000 miles and earned more than 500,000 points and miles with eight different credit cards. While in college, she even co-founded her own travel agency, helping her peers plan and book trips on a budget. As a recent journalism graduate from UNC-Chapel Hill, her goal is to write about travel to make it simpler and achievable for everyone. Her work has also appeared on JetBlue, The Points Guy, Travel + Leisure and CNBC.

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