Does your credit card have an outstanding or unpaid balance on it? If that happens to you, be sure to calculate the interest that should be paid. This is where the credit card interest calculator comes in handy! What is it and how can it help you?
With this amazing tool, you will be able to quickly compute interest payments and compare them in various repayment situations. That will let you examine and track interest for your credit card on a monthly basis, which comes in handy when creating the payment schedule.
So, what can you discover in this article? You will learn how credit card interest works and how to calculate it yourself. In addition, you can find out all about the credit card calculator and learn how to use this tool. Are you ready? We will get straight to the point!
What Is Credit Card Interest?
A credit card can be a great way to spend money, but it can also be a terrible trap. Interest is the cost of borrowing and it is charged by the credit card company for carrying a balance on your account. Credit card interest is a fee that a credit card company charges consumers for borrowing money. This fee is calculated as an annual percentage rate (APR) and is typically higher than the rates applied to other forms of debt.
Interest rates vary from bank to bank and from card to card so it’s important to compare different offers before deciding on one. Some cards have no annual fee or no interest charges if you pay off your balance in full each month, while others may have a low introductory rate that increases after six months or so. Interest rates are usually expressed as an annual percentage. For example, if your credit card has an 18% interest rate, this means that you will pay $1.18 in interest for every $100 you borrow.
The interest rate on credit cards can be higher than other forms of debt because credit cards are considered riskier for the lender. The lender assumes that if they lend money to someone who has a low credit score or no collateral, they may not get their money back. To compensate for this, lenders charge higher interest rates on credit cards so that they can cover any losses in case the borrower defaults on their payments.
How Does It Work?
Now that you know more about credit card interest, let’s see how it works. First, you need to keep in mind that interest on purchases you make will only be charged by your credit card issuer when carrying a balance from month to month. Your interest rate will be irrelevant when paying the balance completely each month. That’s because you will not be charged any interest.
Calculating credit card interest includes a few steps. We will check each of these stages. Here they are!
- Step 1: Converting annual rate to daily rate – First things first, you need to identify your annual percentage rate (APR). It can be found on the credit card statement. To convert it to a daily rate, divide the APR by 365; the formula is as follows: Daily interest rate = APR/365. What you get is actually the periodic interest rate. It is also called the daily periodic rate.
- Step 2: Determining average daily balance – Next, you should discover your average daily balance. Take a look at your statement to identify days that the billing period includes. Begin with the unpaid balance first. Check your statement for the transaction info and compute the balance for each of these days by going through your billing period. The sum of the daily balances should be divided by the length of the billing cycle (it’s measured in the number of days). That’s how you can get the average daily balance.
- Step 3: Putting it all together – Finally, you will be able to estimate the charged interest using this formula: CCI = ADB * DIR * No. of days in the billing cycle.
Where:
- CCI is the credit card interest
- ADB is the average daily balance
- DIR stands for the daily interest rate
Please note that the actual interest charge can be a bit different from the result you get this way. It depends on whether the interest is compounded monthly or daily by your credit card issuer.
Credit Card Interest Formula: How Is Credit Card Interest Calculated?
CCI = Outstanding Amount * Annual Interest / 365 * Number of days in the billing cycle
You need to use this formula when calculating credit card interest. Of course, you can use our calculator instead. The result will be the same. Let’s take an example for a better understanding.
- Outstanding Amount: $2,000
- Annual Interest Rate: 0.18
- Number of Days in Billing Cycle: 20
If we take these figures and use the formula above, we’ll get that the credit card interest is as follows:
CCI = 2,000 * 0.18 / 365* 20 = 19.7260274
FAQs
How Are Interest Rates Determined by Credit Card Issuers?
The purchase APR is the same for every customer when it comes to some credit cards. Others feature varied interest rates, ranging from 12% to 22% for example.
It is worth noting that creditworthiness is a factor that greatly affects the specific rate. The lower rate means that your credit is better. The ranges and credit card rates are typically connected to the prime rate. If your prime rate increases, the rate usually does the same – it goes up too, and vice versa.
Aside from that, the APR is also affected by the type of card sometimes. The interest rates of rewards credit cards, for example, are usually high compared to other types of credit cards.
How Can You Reduce the Interest Rate of Your Credit Card?
There are a lot of things you can control and thus lower your interest rate. Always aim to improve your credit score, as it can enable you to get a lower rate. Here are some ways to decrease the effective interest rate:
- Lower average daily balance by making payments more frequently, several times a month.
- If you cannot pay bills in full, make sure the payments exceed the minimum on your credit card.
- Avoid interest by paying your bills on time and in full.