Calculating Credit Card Interest

Fees and finance charges from a credit card company can break a consumer’s budget if they don’t know what to expect. The ability to calculate credit card interest is a mystery to most but once you understand how it is calculated then you can use your card to its best advantage. It may seem complicated at first, but if you are going to be paying these amounts then it is only fair that you know where they are coming from.

Fees and finance charges from a credit card company can break a consumer’s budget if they don’t know what to expect. The ability to calculate credit card interest is a mystery to most but once you understand how it is calculated then you can use your card to its best advantage. It may seem complicated at first, but if you are going to be paying these amounts then it is only fair that you know where they are coming from.

The first step is to determine what method your credit card company is using to calculate credit card interest. Most companies use the method called an average daily balance. This is a term that you have probably seen on your statement without a clear understanding of what they were talking about.

This means that they determine what your average balance was over the course of the month. To figure out what this average is, add up the balance for the month. Add together the balance for the days of the billing period, minus anything for payments, then divide that by how many days are in your billing cycle.

For example, you have a 30-day billing cycle and you have a balance of $1,000 for the first 15 days of your billing cycle, which is $1,000 times 15. This gives you $15,000. Then on the 16th day you make a $500 payment, so for the remaining 15 days your daily balance is only $500, giving you $500 times 15 days. Once you add this to the previous amount you get a total balance of $22,500. The final step is to divide that by 30 and your average daily balance is $750.

Now that you know the average daily balance you can now calculate credit card interest for that billing cycle as well. Let’s say that your APR is 13.99%. This is your annual interest rate so you cannot simply use this to accurately determine your interest charges. You take the 13.99% and divide that by 12, this will give you the rate of interest you will incur for just one month. In this case that’s 1.1658% of interest every month. The final step is to multiply this amount of interest by your average daily balance, so 0.011658 multiplied by $750. Hit the equal button and you will see that you will be charged $12.49 in interest charges that month.