How Is Your Credit Card Interest Calculated? (2024)

When your credit card’s monthly statement arrives you have two choices: Pay the bill in full by the due date or pay it off over time. The latter choice will give you a longer stretch to tackle a balance but it will add interest fees, according to the annual percentage rate (APR), on top of what you already owe.

What Is My Interest Rate?

Your interest rate on a credit card is typically expressed as an annual percentage rate (APR) and reflects how much interest you’ll pay on your card when you carry a balance. You can find your credit card’s interest rate in the terms and conditions you’ll receive once you’re approved for a new card, on your monthly statement credit or by calling the number on the back of your card and asking.

Variable vs. Fixed Interest

Most, but not all, credit cards charge a variable APR range based on an index rate. This means the rate you’re offered isn’t static, or fixed, and will adjust in tandem with a benchmark rate, typically the prime rate (which itself is influenced by the target level of the Federal Reserve’s federal funds rate). The prime rate is used as a baseline for many types of loans, including credit cards, auto loans and mortgages, and may fluctuate depending on economic conditions and any decisions by the Fed to raise or lower rates.

What Is an APR?

Your APR is the annualized rate of interest you’d pay over the course of a year on any balance. For example, if you have a balance of $10,000 on a credit card with an APR of 17% and leave it untouched for an entire year, you’ll accumulate $1,700 in interest. Note that this example is just to make credit card APR easy to understand—in reality, you couldn’t leave your balance untouched for a year, because at least minimum monthly payments would be required.

When you apply for a credit card, there are several factors that go into determining the APR you’ll receive. Most cards offer an APR range, which is specified in the card’s terms and conditions. For example, if the range on a card you’re interested in applying for is 15.99% to 22.99%, those with the best credit scores are likely to qualify for the lowest ratesin that range.

Those with thin credit files or less-than-stellar credit may not even qualify for a number of credit cards and instead might need to consider cards aimed at those with fair credit scores. These cards typically come with higher APRs as banks consider these applicants to be at a higher risk of default.

APR vs. Interest Rate

When it comes to credit cards, APR and interest rate are interchangeable terms. For mortgages and other types of loans, the APR is often the interest rate plus any other fees that apply. But credit cards don’t roll any other costs into the APR. Charges like annual fees, balance transfer fees or foreign transaction fees are treated as separate and distinct charges.

How Does Your Credit Card Calculate Interest?

Most credit cards calculate your interest charges using an average daily balance method, which means your interest is compounded and accumulates every day, based on a daily rate. In other words, every day your finance charges are based on the balance from the day before.

How to Calculate Credit Card Interest

1. Convert the Annual Rate to the Daily Rate

The daily rate is determined by dividing your credit card’s APR by 365 to find the rate per day. So for a credit card with an APR of 17%, the rate per day would be .17/365, or 0.000466%.

That daily rate interest is then multiplied by your balance that day. Since the average daily balance is compounded, each day the calculation is based on the day before.

For example, if you have a balance of $10,000 on day one of your billing cycle, on day two, your card would have a balance of $10,004.66, which is what you get when you multiply the balance of $10,000 by the daily rate of 0.000466.

This means the balance of $10,004.66 on day two would also be subject to the daily rate of 0.0466%, making your balance $10,009.32 on day three and so on until the end of that month’s billing cycle.

2. Determine Your Average Daily Balance

Your average daily balance is based on your balance for each day of that month’s cycle. Your credit card statement won’t list how much your balance is for each day, but you can calculate it based on your transactions that month. For example, on day one of a 30-day billing cycle you had a balance of $0 and then didn’t make a charge until day five for $500. On day 10 you made another charge of $100. Your daily balance for each day would be as follows:

• Days 1-4: $0 balance
• Days 5-9: $500 balance (reflects the $500 purchase)
• Days 10-30: $600 balance (includes the additional $100 charge)

To find the average daily balance, you’d have to add up the balance for days 1 through 30 and divide it by the number of days in the billing cycle, which is 30 in this case.

So your calculation would look like this:

• (day 1 balance + day 2 balance + day 3 balance + day 4 balance + … day 30 balance) / Number of days in the billing cycle

Using the example above it would look like:

• (($0 x 4 days) + ($500 x 5 days) + ($600 x 21 days)) / 30 = $503.33 average daily balance that month

3. Calculate Your Interest Charges

The final step is to calculate how much interest you’ll pay. This is based on the average daily balance, your daily periodic rate and the number of days in the billing cycle.

So using the examples from above it would look like:

• $503.33 x 0.000466 x 30 = $7.04 in interest you’ll pay that month

That may not be an insurmountable amount of interest for one month, but don’t be deceived. If you let a balance ride or just make the minimum payments each month, it can cost you plenty over time. If you do that same calculation using an average daily balance of $10,000 for example, you’ll accumulate $139.80 in interest just for that month.

Accumulating finance charges are why cards with 0% APR offers can be so appealing to someone who needs extra time to pay off their bill. If you have a $10,000 balance on a card with a 12-month 0% APR offer and make no payments for a year, you’ll owe that same $10,000 without piling a year’s worth of finance charges on top of your existing debt.

But, if you’re considering shifting a balance to a card with a promotional 0% APR on balance transfers, know that these cards often carry a balance transfer fee. It pays to weigh the pros and cons before transferring a balance.

Do Credit Card Issuers Determine Interest Rates?

Since issuers generally utilize both the market rate (generally the prime rate) as a base, they will use that to determine the final interest rate for a product. When you’re given an APR on your credit card of say, 17%, the issuer bases this number on the Prime Rate plus the additional percentage they choose to add on to it. The spread between the Prime Rate and what banks add on is called a margin, and it’s one of the ways banks profit from credit cards.

How to Lower a Credit Card Interest Rate

You can try contacting your issuer and asking them to lower your rate. If your payment history has been consistently on time, they may be able to lower your APR by a percentage point or two.

If they are unable or unwilling to offer you a lower rate, it may make sense to focus on improving your credit score so that you’ll qualify for better rates. Steps you can take include making sure you’re making your payments on time and lowering your overall credit utilization by not carrying too high of a balance on your card.

If the card issuer still won’t lower your rate, you may want to consider a card with a 0% APR balance transfer offer, especially if the ongoing rate after the promotional time period is lower than your current credit card.

There’s one other way you can avoid paying interest altogether: Paying your balance in full every month, if possible.

When Is the Best Time To Pay?

Typically, credit card issuers give a grace period of at least 21 days prior to your due date for you to pay your balance without accruing interest or other penalties for new purchases. This means that regardless of what you owe at the end of your billing cycle, as long as you pay that balance in full and within the grace period, you won’t have to pay any interest.

If you only pay part of the bill, you’ll be charged interest on the remaining amount, which is called a revolving balance.

Paying your credit card bill early in the billing cycle will result in the lower balance being reported to the credit bureaus, which can have a positive impact on your overall credit score.

Bottom Line

There are a number of factors that go into determining how much interest you’ll be charged on your credit card. Your card’s APR, your average daily balance and the number of days in the billing cycle are all part of the calculation. It may be possible to reduce finance charges by asking for a lower APR from your credit card issuer, shifting your balance to a card with a 0% APR offer or a lower offer than your current card or by paying your balance in full every month.