
How Much Are You Really Paying? Use our Credit Card Interest Calculator
It’s always a good idea to know exactly how much you’re paying every time you use your credit card. What may seem like an innocuous purchase could come back to haunt you down the line after you calculate the interest and other related fees. You should be aware of how much you will have to pay down the road when using a credit card, including how soon you will need to pay it off, the annual interest rate and any other guidelines for using the card. Use this guide to find out how much you’re really paying every time you swipe.

LESSON CONTENTS
How to Calculate Credit Card Interest
To determine the true cost of your credit card, you’ll need to calculate your credit card interest. Also, be aware that the credit card might have a promotional period with either a zero-percent or low interest rate. When you are calculating your annual percentage rate (APR), do not include this promotional period.
First, come up with the current outstanding balance on your credit card, or how much you still owe. You will find this on your latest credit card statement. You can also log into your account on the credit card issuer’s website for more information.
You will also need the annual interest rate. The company should include this information when you sign up for a card. It will also be printed on your credit card bill. The interest rate may be listed as APR. The interest rate may also change over time. Many credit card companies will advertise a lower interest rate for the first year or six months. A variable APR will then apply at the end of this trial period, so be sure you have the correct interest rate on hand.
Find the Daily Interest Rate
It’s important to note that credit card companies charge interest by the day, not by year. That means you will accrue interest every day the debt remains outstanding, instead of taking on interest at the end of the year. Consult with your bank or credit union to find out which days are included in the billing period. Some lending institutions may exclude holidays and weekends.
To calculate credit card interest, divide your interest rate, or APR, by 365 for each day of the year. This is known as the periodic interest rate or daily interest rate.
For example, if you have an APR of 6.5%, you will create this equation: 6.5%/365. The total is approximately 0.018% or 0.00018, which is your daily interest rate.
Find Your Average Daily Balance
The balance of your credit card will change from day to day as you continue to make payments and add new charges. Banks and credit unions use this information to calculate the daily interest rate
For example, if the outstanding balance fluctuated between $1,000 and $1,500 last month, your average daily balance would be around $1,250.
Calculate the Total Interest
Once you have the daily interest rate and the average daily balance, multiply them together and then multiply that number by the number of days in the billing period.
For example, with an average daily balance of $1,250, a daily interest rate of 0.018%, and around 25 days in the billing period, the total daily interest would be around $5.625.
This number will vary based on how many compounding days there are in a period. Credit card companies use compound interest, which is the interest charged on the outstanding balance plus interest already accrued. Some credit card issuers will compound interest daily, while others do it monthly. Your outstanding balance will grow exponentially faster if the company compounds interest daily.
You should have a clear idea of how long it will take you to pay off your credit card before you apply. Use our interest rate calculator below to figure out how much you will owe.
How to Reduce Credit Card Interest
Reducing credit card interest comes down to two important factors, the total amount owed and the annual interest rate.
The credit card company will assign an interest rate based on your credit history and score. This number tells the company how likely you are to pay off your debt. If you have a bad rating or no credit at all, you will likely get stuck with a high interest rate. If you have a long history of making your payments on time, you should be able to find a card with a low interest rate.
It’s important to remember that changing your credit rating and locking in a lower interest rate will take time. Considering there’s only so much you can do to change your credit rating; you can reduce your credit card interest by paying off the outstanding balance as soon as possible. If your credit score has improved, call your current credit card company and see if they will lower your APR. Keep in mind that it's better to keep your old accounts than opening new ones to "lock in" a lower rate
Before you sign on the dotted line, figure out how much you can afford to pay each month. The credit card company will identify a minimum monthly payment based on the total outstanding amount. This will either be expressed as a percentage of the current balance or a set monthly amount. You should be able to make this payment each month without fail. However, some credit cards may come with a grace period to shield consumers from extra fees.
If you can, try to pay off more than the minimum amount to pay off the loan faster. The more you pay upfront, the less interest you will accrue.
As you start making purchases with your credit card, avoid spending more than you can afford. It may be tempting to buy certain items on credit, but the longer you hold onto that debt, the more you will have to pay in interest.
Spend time comparing various types of credit cards from different lenders. Credit unions tend to offer lower interest rates than banks, which will help you pay off the debt faster. If you are currently having trouble paying off your credit card debt, consult with a financial coach to learn more about your repayment options.
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