How Is Your Credit Card Interest Calculated?
When you don’t pay your credit card statement balance in full each month, you’ll likely see an interest charge on your next statement. The interest is on the previous month’s purchases and can add up quickly. The exception is if your credit card currently has a limited time 0% APR which allows you to pay as little as the minimum payment and not have to pay interest.
Banks calculate credit card interest using a variety of factors that include the current interest rate, your average daily balance and the number of days in the billing cycle. It’s not back-of-the-napkin math, but it’s possible to figure out.
What goes into calculating credit card interest?
Grace period
The grace period is the time between when one billing cycle closes to the due date. If you pay your credit card bill on or before the due date, you don’t owe a cent of interest. Credit card companies are legally required to mail or deliver your bill at least 21 days before its due date, so your grace period will be a minimum of three weeks long.
Average daily balance
When calculating credit card interest, you’ll first need to calculate your average daily balance. This is just what it sounds like: an average of your account for the month. You can calculate this number by adding up daily balance on your card and then dividing the number by the number of days in the billing cycle.
Scenario 1:
You make a $200 purchase on the first day of the 30-day cycle.
Your average daily balance is $200.
($200 x 30 days)/(30 days) = $200
Scenario 2:
You make a $200 purchase on the first day, a $100 purchase on the 16th day.
Your average daily balance is $250.
($200 x 15 days) + ($300 x 15 days) / (30 days) = $250
Scenario 3:
You make a $200 purchase on the first day, a $100 purchase on the 16th day and a $100 purchase on the 26th day.
Your average daily balance is $266.67.
($200 x 15 days) + ($300 x 10 days) + ($400 x 5 days) / (30 days) = $266.67
Calculating your average daily balance is simple when you make a few transactions. It’s more complex if you use a credit card more frequently to reap the rewards or cash back it offers. Fortunately, there’s no need to do this calculation yourself (unless you really want to) as the bank prints it on your statement.
Interest rate
Your credit card interest rate is printed on your statement and only charged when you carry a balance from month to month. Credit card interest generally compounds daily at a rate that’s 1/365th of the interest rate. If the interest rate is 22.99%, the daily periodic rate is 1/365th of 22.99% — 0.063%.
As the month progresses and you make purchases, the interest accumulates. If you make a purchase every day the purchases from the second day are added onto the first day and multiplied by the daily periodic rate to get your new balance. Day three’s purchases are added to that balance and the interest is calculated and added on to get the balance. This pattern repeats daily and accounts for why it can be hard to overcome credit card debt.
What’s the difference between APR and interest rate?
Days in the billing cycle
Credit card issuers generally use the term “billing cycle” rather than “month” since the number of days in a month varies. Billing cycles tend to be the same length of time but may start in one month and end in the next. You can find the number on your credit card statement — it could be anywhere from 28 to 31 days.
While the number of days in the billing period may vary, issuers generally give you a set payment date that doesn’t change unless you request a different payment due date.
How to calculate credit card interest
Let’s break down the credit card interest formula to calculate how much interest you pay on a $250 credit card balance with a 26.99% interest rate and a 30-day billing cycle. Using the above scenarios of calculating the average daily balance and daily periodic rate.
- Convert the annual rate to the daily periodic rate
22.99% interest rate/365 days = 0.063% - Calculate the daily average balance
($200 x 15 days) + ($300 x 15 days) / (30 days) = $250 - Multiply the daily periodic rate by the average daily balance to get your average daily interest charge
(0.063 x $250) / 100 = $0.16 - Multiply your average daily interest rate times the number of days in the billing cycle
$0.16 x 30 = $4.80
You would pay $4.80 in interest on $250 in new credit card charges if you don’t pay your balance in full each month.
Note that this is a more simplified calculation and doesn’t account for having made a minimum payment or carrying this debt over multiple months.
To save you some time, use our credit card interest calculator to find out how much interest you’ll owe.
When is interest charged on a credit card?
Interest is charged on your credit card balance when you don’t pay your statement balance in full on or before the payment date.
- If your statement closes on January 15, you may have until February 14 to pay your statement balance interest-free. Interest begins accumulating on February 15 and continues until you make your payment.
- If you pay less than the full statement balance on February 14, interest is charged on the remaining balance.
When viewing your account online prior to making your payment, you may notice your “current balance.” This is typically higher than your statement balance because it includes the prior month’s purchases and the current month’s purchases.
Statement closing date: Jan. 15 Payment due date: Feb. 14 Current balance: $600 Statement balance: $500 Minimum payment: $35 |
||
|---|---|---|
| No interest charged | Interest Charged | |
| Pay $500 on February 14 | ||
| Pay $500 on February 15 | ||
| Pay $35 on February 14 | ||
| Pay $35 on February 15 | ||
How to avoid paying credit card interest
It’s possible to use a credit card and never pay a cent in interest. Being able to achieve this requires a degree of financial stability, as well as some organization.
- Pay your balances in full: Unless you have an intro 0% APR, you’ll need to pay your statement balance in full each month. You may notice there’s a difference between “current balance” and “statement balance” if you use your card often. The current balance includes the statement balance plus what you charged after the statement closing date. As long as you pay the statement balance, you won’t be charged interest.
- Pay your balances on time: To avoid making a late payment, which negatively affects your credit score, consider setting up autopay or a calendar reminder to pay your bill. If you live in a different time zone than the one the bank uses, make sure to complete the payment before the cut-off time.
- Use a 0% APR credit card: A 0% intro APR credit card waives the interest for a limited promotional period (usually between six and 21 months), allowing you to pay down your balance faster.
- Transfer your balance to a 0% balance transfer card: If you’re already carrying a balance, consider transferring it to a balance transfer credit card with a 0% intro offer. You’ll likely have to pay a 3% to 5% balance transfer fee, but that may be minimal compared to the interest savings.
- Get a low interest credit card. If you expect to carry a balance over a very long term, consider a low interest credit card. These cards have a regular APR on the lower end of the credit card APR spectrum.
Frequently asked questions
No, credit card interest is not tax deductible. It’s classified as “personal interest” and not one of the allowed deductible types of interest, per the IRS tax code.
Generally, you pay interest on the portion of the balance that isn’t paid by the due date. You’ll find the interest charge as a line item on your credit cards. Check your cardholder agreement for specific details as they relate to your credit card.
You can call your credit card issuer to ask for a lower interest rate. A LendingTree study found that 76% of cardholders who asked for lower interest rates were granted their request.
You can calculate your monthly interest using the method used in the article or with the interest rate calculator above.
You can avoid paying interest on your credit card by paying the full balance on or before its due date each month. If you wait until the due date to make the payment, do so before the cutoff time, which may be based upon an earlier time zone; there’s a three hour difference between the East and West coasts. If your payment is due at 5 p.m. Eastern time but you wait until 4:30 Pacific time, your payment is already late.
You can find your credit card’s interest rate when you log into your account online or via their app. It is also printed in the cardholder agreement that they sent you (physically or digitally) and also posted on their website. If you cannot find it, reach out to their customer service via the number on the back of your credit card.
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