It is tempting to accumulate debts on your credit card. After all, you don’t have to make a payment for 21 days, which gives you some freedom with your budget. And even after the grace period is over, you just need to make a minimum payment, which is only part of the total balance.
It’s a dream solution, isn’t it? Unfortunately, if you make it a habit, your interest charges will add up and you will get a much higher credit card balance than you had expected. Read on to understand how your credit card interest accrues, and get some tips to help you manage your credit card debt.
How to Calculate the Interest on a Credit Card: Four Steps
1. Find out the interest rate on your credit card
The interest rate should be indicated on the related documents, which you should have received at the time of your credit card application. If you cannot find your documents, or are unsure of the interest rate, contact your credit card provider.
But beware: sometimes credit card purchases and cash advances have different interest rates, even for one and the same credit card. Make sure you have all the details you need to correctly calculate your interest rate.
Here are other important factors to consider:
- Ask your card provider if your interest rate is variable or fixed. If it is variable, it could change at any time.
- Please note that if you applied for a credit card during a promotional period, the interest rate may increase once the period ends.
- Make sure you know the terms and conditions, for example if your interest rate will go up if you miss a number of payments.
2. Learn the differences between your statement balance and the unpaid balance (or current balance)
The balance displayed on your monthly credit card statement is the balance on your statement, and generally covers a period of 30 days. It is important to note that the balance on your statement may not start on the first day of the month. Most people find it easier to keep track of their expenses and calculate the interest rate on their credit card when the balance starts on the first day of the month. If your statement starts in the middle of the month, it may be worth informing your credit card provider to find out if you can change it.
Your September survey includes all purchases made between 1 and 30 September and says you have $ 1000. This number represents the balance of your statement. Any unpaid balance from a previous billing cycle will also appear on your statement balance. You will need to pay this amount by the due date shown on your credit card statement to avoid having to pay interest.
Since you received your card statement, you have paid $ 300 more with your credit card. Your outstanding balance is $ 1,300. However, you don’t have to worry about the interest you might be charged for that extra $ 300 until you receive your October statement.
3. Calculate your average daily balance
Credit card interest is usually calculated using your average daily balance. Why? Our credit card balance changes daily, so the average daily balance is used to determine how much you should be charged during a billing cycle.
It can be somewhat difficult to calculate the average daily balance since people generally use their credit card every day. Here is a simple example, however, to help you understand how your average daily balance is calculated.
Purchases made during your billing cycle:
Day 1: $ 500
Day 10: $ 1,000
Day 20: $ 500
To calculate the average daily balance, add up the balance for each day. The calculation will look like the following:
Days 1 to 9: ($ 500 x 9) = $ 4,500
Days 10 to 19: ($ 1,500 x 9) = $ 13,500
Days 20 to 30 ($ 2,000 x 10) = $ 20,000
The total obtained after adding the balances is $ 38,000. Then divide this number by 30 (the number of days in a billing cycle) to find the average daily balance, which in this example is $ 1,266.66.
Tip: Your goal should always be to pay off the monthly balance on your statement. However, if you are unable to do so, try to make your biggest purchases near the end of your billing cycle, which will help lower your interest costs since your average daily balance will be lower.
4. Take out your calculator and do the math
All you need to know to calculate the interest rate on your credit card is your interest rate and your average daily balance. Once you have this information in hand, follow these steps:
- Step 1: Divide your interest rate by 365 (the number of days in a year).
- Step 2: Now that you know your daily interests, multiply this amount by 30 (the number of days in your billing cycle).
- Step 3: Next, take this month’s interest rate and multiply it by your average daily balance – the number you get is the interest you will be charged for this billing cycle.
Let us continue the demonstration by applying an annual interest rate of 30% to the example cited above:
- Step 1: 30% / 365 = 0.00082
- Step 2: 0.00082 x 30 = 0.0246
- Step 3: 2.46% x $ 1,266.66 = $ 31.16
In this scenario, you will be billed $ 31.16 if you do not fully repay the balance of your statement by the due date. This might seem like a small amount, but the next time you receive your bill, you will have to pay $ 2,031.16. If you do not repay the next invoice, your interest will continue to accrue based on the new higher balance.
Are you no longer able to refund your card balance? Opt for a consolidation loan.
There are several advantages to consolidating your credit card debt, including:
- The ability to pay off your credit card debt faster.
- The opportunity to save hundreds of dollars in interest.
- Accessible and easier to manage monthly payments.
- A fixed interest rate and term – at the end of the loan term (the period of your loan), your debt is repaid.