Here at TPG, we always recommend paying off your credit card balances in full every month. Even the best rewards credit cards don’t earn valuable enough rewards to offset the interest you’ll be charged if you carry a balance.
But if you have a balance, it can be helpful to know how your interest is calculated to figure out how much you’re actually paying in interest each month. The numbers on your statement can be confusing, though, and you may wonder, “How is credit card interest calculated?”
If that’s the case, we have you covered. Here’s what you need to know to calculate the interest on a credit card.
How is credit card interest calculated?
Credit card interest is what the credit card company charges you to borrow money from them, which is what you do when you carry a balance. This interest is typically called APR, which stands for “annual percentage rate.” As the name implies, this is the amount of interest you’ll accrue each year on your balance, plus any additional fees.
For example, if you have a credit card balance of $1,000 and your APR is 21%, you’ll accrue $210 in interest over a year.
Related: What is a good APR for a credit card?
How to calculate credit card interest
Credit card interest typically accrues daily, so it’s helpful to know how to calculate the credit card interest you’re charged daily or monthly; you aren’t just charged one lump interest sum at the end of the year.
To break your APR down into monthly interest, divide the APR of 21% by 12. In this example of a $1,000 balance, your monthly interest rate is 1.75% or a monthly cost of $17.50.
To break it down into daily interest, divide the APR by 365, giving you an interest rate in this example of approximately 0.06% or a daily cost of around 58 cents per day.
Daily Newsletter
Reward your inbox with the TPG Daily newsletter
Join over 700,000 readers for breaking news, in-depth guides and exclusive deals from TPG’s experts
Of course, these numbers assume that you keep your balance at $1,000. If you pay down your balance each month, you’ll accrue less interest. And if you charge more to your card or don’t pay the interest as it accrues, your balance will increase, meaning the amount of interest you’re charged will also increase.
Related: How to avoid and reduce credit card interest
Types of credit card interest
To make matters slightly more confusing when calculating your interest on a credit card, the credit card company might charge you different types of interest.
In the above example of calculating credit card interest, we assumed a “fixed rate” APR, which, as the term implies, is an interest rate that doesn’t change.
However, many cards have a “variable rate” APR, meaning that your interest rate is subject to change monthly based on federal rates. If you have a variable rate APR, you’ll want to look at your APR on your statement every month and recalculate your monthly interest when it changes.
Some cards also have a lower “promotional APR” for some time. If you have one of these, pay careful attention to the promotional period end date and calculate your monthly interest based on your new APR when it ends. Of course, if you can, the best strategy is to pay off your full balance during the promotional period and avoid paying any interest moving forward.
Related: How to consolidate and pay off credit card debt
Bottom line
If you never look closely at your credit card bill, it’s easy to assume that credit card interest is impossible to understand. However, now that you know how credit card interest is calculated, you can use this information to understand exactly how your annual, monthly and daily credit card interest amounts are calculated.
Related reading:
