How to Calculate Credit Card Interest | Credit Cards

Nobody wants to pay interest on credit card purchases, but you won’t have a choice if you carry a balance. Understanding how your credit card’s interest is calculated can help you understand what steps to take to minimize the interest you have to pay. However, you might be surprised at how difficult it can be to manually figure out your credit card’s interest charges if you want to double-check your card issuer’s work.

Curious about how much interest you’d pay if you carried a balance month over month? Here are some basic steps you can follow to calculate credit card interest.

A credit card company bases its interest rate on a few factors, including the current prime rate, the information contained in your card application and your credit score. Card issuers tend to reserve their lowest rates for customers who have good to excellent credit. If your credit is considered when approving your card application (or not) and setting the interest rate, the creditor needs to tell you the credit score that was used and what specific credit factors led to the decision.

Because credit card interest is calculated on your daily balance, you can reduce your interest charges by continuously trying to lower your balance each day.

For example, you can make payments to your credit card account as soon as possible, rather than waiting until your payment due date. You can avoid increasing your account’s daily balance by postponing purchases as long as possible, especially larger ones.

If you have solid credit or if you’ve held the card for a while, you may be able to negotiate a lower interest rate with your credit card company.

All credit cards have interest rates, or APRs. APRs are a standard unit of measure of interest charges over time. However, even though APR is expressed as an annual percentage, it can be used to determine interest charges over any period of time.

Nearly all credit cards use a variable APR. This means that your interest will vary based on the prime rate, which rises and falls based on monetary policy set by the Federal Reserve. For example, if the prime rate is 4.25% and card’s base rate is 10.74%, you’ll have a variable APR of 14.99%.

Thankfully, the prime rate usually doesn’t change dramatically. APR increases due to hikes in the prime rate won’t be as impactful as other triggers, such as late payments.

There is usually more than one interest rate associated with your credit card, depending on how you use it. Here’s a closer look at the different types of credit card interest rates you might encounter.

In general, a good credit card interest rate is anything considered below average. The average credit card rate was 21.19% APR as of August 2023, according to the Federal Reserve. So if you can find a credit card with a rate around 16%, it’s considered a good rate.

At the same time, it’s possible to sidestep credit card interest altogether. “Pay off the purchase, in full, during the grace period, and you won’t pay any interest or fees,” says Robert Farrington, founder of financial literacy website The College Investor.

During a credit card’s grace period, the credit card issuer waives the interest charges between the statement closing date and the payment due date. You must have a zero balance at the start of each month to use the grace period during the following month. So, if you carry a balance from one month into the next, you won’t be able to avoid interest charges by paying this month’s statement balance in full. However, paying your next statement balance off will allow you to avoid interest charges the next month.

If your card has a grace period, then it’s required to last at least 21 days. Many credit cards have a grace period of 25 days. However, some cards marketed to applicants with bad credit may not have a grace period at all, so new purchases begin accruing interest right away.

It’s important to note, however, that grace periods don’t apply to cash advances. “They begin accruing interest from the day you receive the money,” Farrington says.

Another way to avoid interest charges is to take advantage of 0% APR introductory offers on new purchases, balance transfers or both. These offers will allow you to avoid interest charges on your balance for a limited time, typically between six and 21 months. Interest only begins to accrue on your remaining balance after the introductory period expires. It’s common for credit card issuers to offer 0% APR deals to attract new customers, but you can ask your existing card company about limited-time offers, as well.

Keep in mind, many store credit cards offer deferred financing options that calculate interest differently from those with 0% introductory APRs. With deferred financing, interest accrues on your average daily balance, but it’s waived when it’s paid in full before the promotional financing period ends.

However, credit cards that offer deferred interest may also come with drawbacks. If the balance isn’t paid in full by the end of the promotional period, any interest that accrued will be charged. One late payment can trigger deferred interest.

It’s not easy to manually calculate your credit card’s interest charges, but it’s important to know how the process works so you can avoid the negative effects of compound interest.

Farrington suggests treating your credit card like a debit card: Spend only what you really need, and pay it off every month, on time. That’s the only way to avoid interest and fees, such as late fees, and ensure that any rewards you’re earning don’t cost more than they’re worth, he says.