How to Calculate Credit Card Interest

Many people with credit cards must deal with the reality of interest rates, but they might not know how to calculate interest. Credit card companies charge interest when you don’t pay your statement balance by the due date. Your interest rate is usually expressed as an annual percentage rate (APR).

This article details how to calculate credit card interest.

What is a Credit Card Interest Rate?

If a customer does not pay their credit card’s statement balance in full by the due date each month, the issuer may begin charging interest on the unpaid balance. Your credit card’s interest rate is the number used to calculate how much interest will be added.

You should also keep in mind that credit cards typically have multiple interest rates for different uses. For example, your card may have one interest rate for purchases and another for cash advances. Always check your card’s terms to understand how different interest rates are applied.

How does the Daily Balance Method Work?

Some credit card issuers calculate interest by using the daily balance method. This method calculates interest by multiplying the balance on a credit card each day in the billing cycle by a “daily periodic rate,” which is the APR that applies to that balance divided by 365. This calculation is done for each balance on a credit card. You may, for example, have a purchase balance and a balance transfer on your card account that has separate APRs.

If the credit card issuer compounds interest daily under this method, the interest charged from the prior day will be added to the balance of the current day, and that balance will be multiplied by the daily periodic rate to determine the interest charged for the current day. If the issuer does not compound interest under this method, the interest charged from the prior day will not be added in the calculation for the current day balance.

The interest charges for each day in the billing cycle are added together to determine the total interest for that balance in the billing cycle.

How Does the Average Daily Balance Method Work?

While some credit card issuers use the daily balance method, others will use the average daily balance method. If you'd like to know the specifics of how the average daily balance method works, then take a look at this rundown:

Convert the Annual Percentage Rate to the Daily Periodic Rate

First, calculate the daily periodic rate by dividing your APR by 365, the number of days in a year. 

Determine your Average Daily Balance

Next, check which days are included in the billing period. Interest charges depend on the balance on each one of those days, so you’ll need to record what your daily balance was on each day during the billing period.

If the credit card issuer compounds interest daily under this method, the prior day’s interest charge is added to your daily balance.  If the issuer does not compound interest under this method, the interest charged from the prior day will not be added to your daily balance.

After this, add up all the daily balances and divide them by the number of days in the billing period. This will give you your average daily balance.

Calculate your Credit Card Interest

Finally, multiply the average daily balance by the daily periodic rate, then multiply that number by the number of days in the billing period. This should give you your total interest for that billing period.

What are the Different Types of Credit Card Interest?

There are three types of credit card interest rates:                                  

Variable Interest Rates

These rates change based on a benchmark such as the prime rate. For example, if the prime rate is 4% and your credit card company adds within a range of 12.99-22.99 percentage points, the APR would be 16.99%-26.99%. Card users are assigned a single number in this range based on their creditworthiness. With a variable interest rate, this APR may change when the benchmark changes.

Variable interest rates can change anytime, and credit card companies are not required to notify you when the rate is set to change based on the benchmark used, such as the prime rate. If there’s an increase in your APR for any other reason, though, your issuer is required to send you a notification.

Fixed Interest Rates

A fixed interest rate means that card’s interest rate is not subject to change as long as the user follows the card’s terms and conditions. This type of rate may be higher than variable rates, as the customer pays a premium for the lack of volatility.

Fixed-rate cards can still change rates under certain conditions, such as the customer being more than 60 days late on a payment. There will be a notice of at least 45 days before a card issuer will change a fixed interest rate.

Promotional Interest Rates

Lower rates may be offered for a limited time and for specific purposes. For example, some cards offer a 0% intro APR on purchases, balance transfers or both for a specified period. 

Always use promotional offers responsibly. It’s important to pay off the promotional balance by the end date. Otherwise, you could be stuck with interest charges for purchases or balance transfers on which you previously were not charged interest.

Ways to Pay Less Interest on Credit Cards

If you’re trying to keep your interest charges on your credit card balance down, keep the following in mind:

  • If you don’t have a 0% introductory APR, you can still usually avoid interest if you pay your statement balance in full every month by the due date.
  • If you are approved for a new credit card with a low interest rate on balance transfers, you may be able to transfer your balance on a credit card with a higher interest rate to this new card. You will still have to pay off any interest you’ve already accrued, and you may also have to pay a balance transfer fee, but you may be able to keep interest on your balance from accruing as quickly by making this transfer.
  • If you can’t pay your statement balance on your credit card in full each month, you could still try to make more than the minimum payment on or before the due date. This will help you pay down your balance, which can lower your interest charges if you don’t have a 0% introductory APR. Paying at least the minimum payment by the due date each month will help you avoid any penalties, such as late payment fees and a higher penalty APR. If you pay more than the minimum payment by the due date each month, it will also help lower your credit utilization, which will help improve your credit score.

Find the Best Credit Card for You

With this information, you can improve your understanding of how credit card interest works. You can also use this information to research what cards will be a good fit for your financial needs. Be sure to see which of Citi’s credit card offers could be best for you.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.

Additional Resources

  • Utilize these resources to help you assess your current finances & plan for the future.

  • Learn how FICO® Scores are determined, why they matter and more.

  • Review financial terms & definitions to help you better understand credit & finances.