Understanding Credit Card Interest Rates
Credit card APR (Annual Percentage Rate) is the interest rate charged if you carry a balance on your card. It’s usually shown as a yearly (or annual) rate, but most credit cards calculate it daily or monthly. Knowing how to calculate APR charges can help you understand the cost of carrying a balance and avoid surprise fees. Here’s how to break it down!
Step 1: Find Your APR and Daily Rate
- Find your APR: Check your credit card statement or online account—it will list the APR.
- Calculate the daily rate: Divide your APR by 365 (days in a year). For example, if your APR is 20%, your daily rate is:
| Daily Limit = |
20% |
≈ 0.055% |
| 365 |
Step 2: Calculate the Average Daily Balance
- Track your balance each day of the billing cycle. This can include any new purchases or payments made.
- Add up all your daily balances and divide by the number of days in the billing cycle (usually around 30).
For example, if your daily balances over a 30-day cycle add up to $6,000, then:
| Average Daily Balance = |
$6,000 |
≈ $200 |
| 30 |
Step 3: Calculate the Interest Charges
- Multiply your average daily balance by your daily rate.
- Then multiply that result by the number of days in your billing cycle.
For example, if your average daily balance is $200 and your daily rate is 0.055%, the interest for a 30-day billing cycle would be:
Final Tip: Avoiding Interest
To avoid paying interest, try to pay off your entire balance each month before the due date. Most cards offer a grace period that allows you to avoid interest if you pay your full balance on time. However, after the due date and potential grace period, any unpaid balance is subject to interest charges.
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