4 Steps To Calculate Credit Card Interest | NerdWallet

Credit card interest is a monthly fact of life for tens of millions of credit card holders, but how much money you're actually paying in interest doesn't have to be a mystery. Now, calculating credit card interest can be complicated, but as a credit card expert at NerdWallet, I'll give you an easy hack to doing so. NerdWallet has a credit card interest calculator, which I've posted in the comments section down below. Enter your balance, your card's interest rate, and the number of days in the statement cycle, and that calculator, which was built by one of my colleagues, does all the work for you. Okay, but you're a nerd, just like me, and you want to know how credit card interest is calculated, not just what the interest amount actually is. How much interest you get charged on a credit card is determined by a handful of factors, so let's go ahead and break them down here. Now, with credit cards, there's a grace period to pay off your debt after the time you made that purchase. Yes, that's the beauty of a credit card. You can make a purchase now, but you don't have to pay it off until the due date, which likely won't actually be until next month. Now, if you do pay your credit card bill in full by the due date every month, you'll never have to pay interest on your purchases. Period. You don't even need a credit card interest calculator because there's nothing to calculate. Your interest rate can essentially be irrelevant. But for folks who roll debt over from one statement to the next, that's when interest starts to apply. So let's dive into the Let's start with step one. To make the calculation, you need to know your average daily balance. The number used to calculate your interest charge is not the balance on the last day of your statement. It's actually the average daily balance during that billing period. The card issuer takes the balance on your account for each day in the period, adds them all together, and then divides them by the number of days in the period. For example, let's say you had a 30-day statement cycle and you started with a balance of $100. If you never made any additional charges or payments for the full cycle, your average daily balance would be $100. But let's say you started with an $100 balance and then you had a $45 charge post on the 11th day of the cycle. Then your average daily balance would be $130 because that's 10 days at $100 and then 20 days at $145. Now, most people have more than one or two charges on their account. So calculating average daily balance is trickier than that, but you get the point. NerdWallet also has more advanced calculators on its site that can really help you nail down your average daily balance. Now let's move on to step two. The next factor in calculating how much you owe in interest is the actual interest rate. Interest rates are given as annual percentage rate or APR. Although the stated rate is an annual rate, credit cards typically charge interest on a daily basis. So if your APR is, let's say, 18.99%, the daily rate would be about 0.052%. That's the number you get if you divide 18.99 by 365. You can usually find the card's APR in the app or on the card issuer's website or on your monthly statement. You can even call customer service and ask. Now note that credit card issuers can change your interest rate. Interest rates can be affected by factors including your own credit worthiness, the type of card you have, and general market conditions. Okay, it's time for step three. Find out the number of days in your cycle. This varies by issuer, but it tends to be between 28 and 31 days. So we've got these three numbers, which leads us to step four. The final step is to multiply your average daily balance by your daily rate and then multiply that result by the number of days in the billing period. Just note that depending on whether your issuer compounds interest daily or monthly, your actual interest charge might differ slightly from this calculated amount. Okay, so you figured out how much you're paying in interest and your next logical question might be, how can I pay less of it? Credit card issuers charge interest on purchases only if you carry a balance from one month to the next. If you pay your balance in full every month, your interest rate is in some ways irrelevant because you don't get charged interest at all. So obviously paying in full is the most cost effective way to go, but sometimes carrying a balance is inevitable based on your financial situation. In that case, a low interest credit card can save you money. Visit nerdwallet.com for reviews and our picks of the top low interest credit cards so you can find one that works for you. And if you enjoyed this particular video, please ensure to give it a like and subscribe.