How to Calculate Credit Card Interest

If you own a credit card, you’ve probably heard of the term Annual Percentage Rate, or APR. This is the annual interest rate on the balance on your credit card. However, the term can be misleading because credit card balances are not charged interest on an annual basis. Keep in mind that delayed/introductory rates (for example, 0% APR for six months!) will expire after a certain period of time, so keep track of when your rate may change.  To keep your finances in order, you must understand how to calculate the monthly interest you pay on your credit card balance.

Method 1 Calculating Interest For Fixed and Variable Rates

1. Recognize how these rates are similar to and different from one another. Both rates are “purchase” APRs, which means they apply to normal credit card purchases. To calculate how much interest you pay on your balance for the month, you must know your Daily Periodic Rate (DPR). This is explained in the following step. The important thing to remember is that you do not pay interest on your purchases if you pay off the balance before the end of your billing cycle for either of these “purchase” APRs. At the end of each billing cycle, interest is only applied to the outstanding balance.

A fixed APR will not change unless you consistently fail to make timely payments. The credit card company will then send you a letter stating your new default/penalty rate.

A variable rate can change in response to national interest rates or other economic factors. It could, for example, change in response to changes in the federal prime rate published by the Wall Street Journal.

Examine your contract or credit card statement to determine whether your APR is fixed or variable.

2. Determine the Daily Periodic Rates (DPR). Interest charges are typically calculated on a monthly basis by credit card companies. Because months vary in length — for example, January is 31 days and February is 28 days — most businesses calculate interest using DPRs. Divide your annual APR by 365 to get your DPR (the number of days in one year).

As an example, consider a 19% fixed or variable APR: 0.052 = 19 365 Your DPR is as follows.

3. Divide that figure by the number of days in the current month. You would multiply your DPR by 31 in January: 0.052 x 31 = 1.61. For the month of January, your interest rate would be 1.61 percent. You would multiply your DPR by 28 in February: 0.052 x 28 = 1.46. For the month of February, your interest rate would be 1.46 percent.

4. Multiply your interest rate by the amount owed. Remember that if you pay off your entire balance by the due date, you will not pay any interest. However, if you only make the minimum payment or make a payment that is less than the entire balance, you will be charged interest on the outstanding balance. Move the decimal point two positions to the left to convert your interest rate to a decimal. So, a 1.61 percent rate in January is 0.0161, and a 1.46 percent rate in February is 0.0146.

If you have a $1,000 outstanding balance on your card at the end of the January billing cycle, you would pay $1,000 x 0.0161, or $16.10.

If your outstanding balance is $1,000 at the end of the February billing cycle, you would pay $1,000 x 0.0146, or $14.60.

Method 2 Calculating Interest for Default/Penalty APR

1. Understand what a default/penalty APR is. A default/penalty rate is higher than the rate you received when you applied for your card. It is triggered when you violate your contract’s penalty terms. Violations may include exceeding your balance limit or making late payments on a regular basis.

2. Determine what your default/penalty APR is. A standard default/penalty APR may be found somewhere in your statement or contract. It’s more likely, however, that the bank will send you a letter informing you of the rate change. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009, also known as the CARD Act, requires banks to give you 45 days’ notice before changing your interest rate. In the letter, your bank will explain your new rate.

For example, you may have had a 20 percent APR at the outset. However, you missed two payments in a row — a total of 60 days. You received a letter informing you that your credit card company was raising your rate to a default/penalty rate of 35%.

3. Determine the DPR on your new rate. Divide your new rate by 365, the number of days in a year. In our case, you’d solve the following equation: 35/365 = 0.0958 This is the daily interest you are paying.

4. Calculate your interest rate for a given month. Because the number of days in a month varies, make sure you’re using the correct number for the month at hand. Because January has 31 days, multiply 0.0958 by 31 to get 2.97. In January, your interest rate would be 2.97 percent of your balance.

5. Multiply your outstanding balance by the monthly rate. Remember to round the percentage to the nearest decimal point. In our example, 2.97 percent is converted to 0.0297.

If you have a $1,000 balance at the end of January, you pay interest of $1,000 x 0.0297, or $29.70.

Method 3 Calculating Interest for a Tiered APR

1. Learn how tiered APRs work. The credit card company uses a tiered APR to apply different rates to different parts of the balance. For example, it may charge 17% on balances up to $1,000 and 19% on balances above $1,000.00. If you have a $1,500 balance, you would pay 17 percent interest on the first $1,000 and 19 percent interest on the remaining $500.

2. Determine the DPR for each tier. Determine how many tiers are applied to the outstanding balance at the end of your billing cycle. You must calculate the DPR for each of those rates separately. As an example, consider the following:

For the first $1,000 of your balance, 17 365 results in a DPR of 0.047.

For the last $500 of your balance, 19 365 results in a DPR of 0.052.

3. Each DPR should be multiplied by the number of days in the month. As you can see, the steps are essentially the same for fixed and variable rates. However, it is critical that you remember to apply each step to the various tier rates. Assume we’re calculating the monthly rate for the month of January, which has 31 days.

For the first $1,000, multiply 0.047 by 31 to get a monthly rate of 1.457 percent.

For the last $500, 0.052 x 31 equals a monthly rate of 1.612 percent.

4. Determine the amount of interest paid on your outstanding balance. To convert percentages to numbers that can be multiplied, move the decimal points two places to the left.

$1,000 multiplied by 0.01457 equals $14.57 in interest paid on the first $1,000.

$500 multiplied by.01612 equals $8.06 in interest paid on the last $500.

5. To find your total, add the amounts together. $14.57 + $8.06 = $22.63 in interest paid on your $1,500 outstanding balance.

Method 4 Calculating Interest for a Cash Advance APR

1. Understand the APR on a cash advance. This rate may be higher than your standard APR, but it differs significantly from a purchase rate. Purchase APRs are only calculated at the end of each billing cycle. However, with a cash advance, interest is charged every day until the cash advance balance is paid off. The cash advance rate becomes effective the moment you do one of the following:

Using your credit card, withdraw cash from an ATM or bank branch.

Money should be transferred from your credit card to your overdraft account.

Make a check out of your credit card.

To purchase foreign currency, use your credit card.

2. Examine your statement and contract to find out what your cash advance APR is. You might have to squint to read the fine print, but it’s there somewhere.

3. Determine your DPR. This is the daily interest rate you pay. Divide your cash advance APR by 365 days to find it. For instance, if your cash advance APR is 20%, solve the following equation: 0.055 = 20 365

3. Count the number of days you waited to repay the advance. Multiply the previous step’s total by the number of days. So, if you waited 30 days to repay your cash advance at a 20% APR, solve the following equation: 1.65 = 0.055 x 30 (days). The interest rate on the cash advance is 1.65%.

4. Determine how much interest you paid. Divide the amount you withdrew by the interest rate from the previous step. In our example, if you withdraw $1,000, you would need to solve the following equation: 1,000 multiplied by 0.0165 equals 16.50. Your cash advance will cost you $16.50 in interest.

Method 5 Protecting Your Finances

1. Pay your bills on time. The more late payments you make, the more likely it is that your credit card company will raise your APR. If you miss a payment, make up the difference as soon as possible. Even before 30 days have passed, the company may report you to credit reporting agencies.  This has a long-term negative impact on your credit rating. Maintain your FICO score by demonstrating that you are a dependable debtor.

2. Keep an eye out for rate hikes. Before raising your interest rate, your credit card company is required by law to give you 45 days’ notice. However, the company may refuse to provide you with an explanation for the rate change. If you do not receive an explanation, contact your credit card company to learn why your rate was changed. If the company is unable to provide you with a satisfactory response, it may be time to transfer your balance to another credit card.

Missed payments or a low credit score are both good reasons to raise your rate.

3. Attempt to reduce your APR. Credit card companies are in the money-making business. They will not reduce your APR simply because you are a good customer. If you want to be rewarded for years of on-time payments, contact your credit card company and persuade them to change your interest rate.

Before you call your credit card company, find out what a reasonable APR for your FICO score would be.

Then, based on your research, call your credit company and try to renegotiate your APR.

If the company refuses, you may be able to transfer your balance to another credit card.

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