Person holding a credit card and phone.

How Is Credit Card Interest Actually Calculated?

Your credit card interest rate is the ultimate enemy of your financial goals! For one, if you don’t pay off your balance on your credit card from month to month, you get charged interest. Next, interest adds to your credit card balance, making it more expensive to pay off your credit card as time goes by. This ends in a domino effect that is difficult to get out of. 

Knowing how credit card interest works can empower you to take back control. Let’s break this down. 

How Does Credit Card Interest Work? 

Your credit card has an annual percentage rate or APR which is your interest rate. If your APR is 15%, please note, know that doesn’t mean you’ll get charged 15% interest once a year. Wouldn’t that be nice? 

Unfortunately it’s not that nice. Your APR is essentially the cost of borrowing money. But, depending upon how to manage your credit card, you could have a variable APR, meaning it fluctuates. Your interest rate could end up higher or even at 0%! 

Why does it range so much? Because interest is calculated on a daily basis and only charged if you don’t pay your balance in full from month-to-month. 

It’s important to understand how to manage your credit card responsibly because while it would be ideal to pay your bill in full each month, sometimes life happens! What we don’t want is for interest to derail your financial progress in the short or long term. 

How to Calculate Credit Card Interest

Being able to calculate your credit card interest and you make sure your bill is correct. It will also help you understand the true cost of your credit card debt, which might motivate you to pay your credit card off faster. 

Here’s how to calculate your credit card interest: 

#1. Take Your Annual Rate and Figure Out Your Daily Interest Rate 

How to find your interest rate? It’s going to be listed on your credit card statement as the APR. 

Remember, interest is calculated on a daily basis, so we need to find out the daily interest rate. To do so, divide your APR by 365. 

#2. Figure Out Your Average Daily Balance 

Your credit card bill will tell you what days are included in your billing period. You’re going to take your unpaid balance (whatever you didn’t pay off last month) and write down the balance on your card for each day in your billing period. 

Then add up all of your daily balances and divide that by the number of days in your billing period. You just figured out your average daily balance. 

#3. Make it All Make Sense 

Now that you’ve got all these disparate numbers, we’re going to do some more multiplication and division.  

Multiply your average daily balance by your daily interest rate. Then you want to multiply that number by the number of days in your billing period. 

Here’s where it gets complicated. Don’t worry; you got this.

If your credit card issuer compounds interest daily or monthly, then the amount you’ll have to pay in interest will vary. 

Wait — what’s compounding? It’s when accrued interest is added on to your unpaid balance (which is why it's to your benefit to pay off your bill in full each month). Yes, that means you’re paying interest on your interest. 

Blame compound interest if you pay more than your actual interest rate throughout the year. 

credit card

How to Reduce What You Pay in Interest

Because credit card companies only charge interest if you carry a balance each month, it’s always a good idea to pay off your credit card in full. If you never carry a balance, then you never have to worry about paying interest. You don’t even need to know what your interest rate is! 

But, we aren’t in a fairy tale, and that’s not realistic for everyone. Here are some things you can do to manage your interest rate better. 

  • Switch from your current credit card to a balance transfer credit card, which will usually have a lower interest rate. Just watch out for the balance transfer fee. 
  • Shop around for the best credit card offer. Different lenders will offer you different interest rates. Don’t be afraid to do your research to find the best offer for you and then relay that offer to the credit card companies you’re considering. If one company has a better rewards credit card, but a higher interest rate, let them know that another company is offering you a lower interest rate and see if they’ll be willing to match or improve upon that offer. It might be intimidating, but it never hurts to try! 
  • Pay more than the minimum payment if you can’t pay your bill in full. It will help lower your credit card balance and help you cover the interest on your card. 
  • Make multiple monthly payments to help reduce your average daily balance. We’ve established that your average daily balance plays a big role in what amount of interest you’re charged. If you lower your average daily balance, you lower your interest payment. 

Where To Go From Here

Now that you know what credit card interest is and how to calculate your credit card interest rate, there are a few things you should keep in mind. 

Whenever you’re considering getting a new credit card, make sure that you’ll probably be able to pay off the balance each month based on what your credit card limit is. 

You’ll also want to make sure you know what the interest rate is and what the conditions are around it. 

And if you want to build credit try EXTRA.¹ We’re the first debit card that helps you build credit without all this complicated finance stuff.¹ 

How do we do it? We sync up with your bank account² and give you a spending limit based on your bank balance with no credit check. So when you swipe your EXTRA card, we spot you for that purchase and then pay ourselves back the next business day. At the end of the month, we tally up all those purchases and report them to the credit bureaus as credit worthy payments enabling you to build your credit¹ with ease. It’s really that easy.

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