How Is Credit Card Interest Calculated?

Having a credit card has a lot of benefits including building your credit, getting rewarded for spending with cash back or travel points, and increasing your buying power. These perks are really great when you keep a low to non-existent balance every month, but it’s hard to enjoy its benefits if your balance is constantly building.

Why? If you're not successful in repaying your credit card balance in full after each billing period, your interest will increase. This means you’ll accrue more interest and will have to repay a higher balance the next billing cycle. I know you don't want that!

I'm going to get specific here and share how to calculate your credit card interest rate yourself so you know what to expect if you couldn't repay a credit card bill. If you're not a credit card holder and you plan to be, this article is for you too! Either way, you're going to get the scoop on how credit card interest works and know what to expect when it’s time to repay your lender.

Before we get into the math, there are 1 or 2 things we should unpack before sharing the calculations to credit card interest.

what is credit card interest?

A credit card is a line of credit a lender will give you to borrow money on an as-needed basis. Your interest rate is simply the cost of borrowing that money. If you pay off your balance in full each month, you won’t have to worry about paying interest since it’s only charged if you don’t pay your bill in full. The interest is expressed as an APR Annual Percentage Rate . 

Psst... You can avoid paying interest on a credit card by paying your credit card balance in full each month (when possible). 

variable vs. fixed credit card interest rates

When it comes to talking about interest, there are 2 types – variable rate and fixed rate. A simple explanation between the two different interest rates is that variable interest adjusts over time in response to the index rate, which tends to fluctuate due to the economy.

A fixed interest rate on a credit card stays the same. Many, but not all lenders, have credit cards with a variable APR range charge

types of apr

• 0% Intro APR: Lenders offer a 0% APR for a certain time period where you’re not paying any interest over time. Here's more about  0% intro APR credit cards.
• Purchase APR: If you’re carrying a balance month to month, purchase APR is what you’ll pay for purchases you make on the credit card.
• Balance Transfer APR:  This is paying interest on transferring funds from one credit card to the other.

• Cash advance APR:  This is when you use your credit card to get cash. Doing this will cause your interest to accrue immediately based on the card's cash advance rate. Psst… Keep in mind that cash advance APRs are much higher than the purchase APR.  

how do you calculate credit card interest?

When calculating the interest, here are the few elements you’ll need to know:

• Your Credit Cards APR (Annual Percentage Rate): This is found in your credit card statement. Expressed as a percentage, but the rate depends on various factors like creditworthiness, debt to income ratio, and other factors (Psst... if you have bad credit, your interest rate could be as high as 25%)
• Your Average Daily Balance: This is the loan amount carried each day on your billing cycle.  
• Compounding Period (Number of Days in the Billing Cycle):  This is the span of time between when interest was last compounded and when it will be compounded again. Generally, the number of days in a billing cycle is 28 - 30 days depending on the month.
• Days in the Year: In your calculation, you're going to include the days in a year to help determine the daily interest accrual. 

let's get calculatin'!

Let's say you have Skyla's Platinum Rewards credit card with a balance of $3,000 at the end of your 30-day billing cycle and your purchase APR is 11%. If you don't add any additional charges to your card, here's what you'll pay in interest:

How much interest will I pay for this billing cycle?

• Take your APR and divide it by the number of days in the year: Your calculation would be  (.11)/365 = 0.000301. This is your daily periodic rate. 

• Calculate your average daily balance: This is where it may get a bit tricky. To determine your average daily balance, you're going to need your latest credit card statement and know the exact amount you spent during that billing period.

  Start with the unpaid balance from the previous period and add it up along with the balance from the current period. Add up each purchase and divide that amount by the billing period, in this case, 30 days. This will give you your average daily balance.

• Determine your daily interest: Simply take your daily periodic rate and multiply it by your average daily balance. Let's say on average your daily balance is $3,000 and your daily periodic rate is 0.000301.  Your calculation would be 0.000301 x 3000 = 0.903

• Now multiply that by the number of days in your billing cycle: If your billing cycle is 30 days long then you'll multiply 0.903 x 30 = 27.09. You would be charged $27.09 in interest for the billing cycle.  

• Multiply the loan balance and the credit cards APR: 3000 x .11 = 330 ($330 is your annual interest)

once you start using your credit wisely.. here’s what you can expect  

Now that you know how to calculate your credit card interest rate, it's time to use your credit card wisely. The fabulous thing about credit cards is they provide buying power, but you need to use them with caution. Keep in mind that anything that you charge on the card, you'll have to pay it back. And, if you don't pay it back in full and all at once, expect to pay interest.

Another way to reduce interest is making multiple payments and more than the minimum payment each month.  This will certainly help reduce your credit card balance and overall your interest. 

Now that you know how to calculate your credit card interest rate, make sure to check out our article on What Happens if You Have 0% APR Credit Cards.