How is credit card interest calculated?
Everything you need to know about calculating credit card interest. Calculate monthly credit card interest on a credit card without a calculator.
Credit card interest is something that everyone who has a credit card has to deal with, although nobody likes paying interest on their credit card charges. Credit card interest calculations are usually performed automatically by the bank who issued your credit card, but you should also know how to calculate credit card interest to keep track of your expenses and minimize the amount of interest you have to pay on your credit card.
How does credit card interest work?
Before you learn to calculate credit card interest, it’s important how the interest works. When you use your credit card you’re essentially borrowing that sum from the bank. Once the bank sends you a credit card statement, you have two options: the first one is to pay back the entire amount you owe before the due date without paying any interest; the second option is to pay the minimum amount due, which includes interest, and leave the rest of the sum to be repaid later. The APR of your credit card is often broken down into the Daily Periodic Rate, or DPR, but dividing the APR by 365 or 360. Then, the bank applies the DPR to the unpaid balance on your credit card, increasing this amount every day due to interest.
How to calculate credit card interest?
The first step to calculating your credit card interest yourself is to determine the DPR. To do this, read through your credit card statement and find out whether your bank uses 360 or 365 to calculate DRP, then, divide your credit card’s APR by 360 or 365 to get the DPR. For instance, if your APR is 12.25% and your bank uses 365 days to calculate DPR, your DRP will be 0.03%. This means that every day 0.03% of your average daily balance will be added to the amount you owe. You can find your average daily balance on your credit card statement or you can add all the daily balances in a billing period together and then divide that amount by the number of days. Finally, to find your estimated credit card interest, multiply your average daily balance by the DPR and the number of days in the month for which you’re doing the calculations. This is your estimated interest for one month. Keep in mind, however, that the actual number will be a little higher since the interest is compounded every day, so your outstanding balance will be getting a little larger every day.