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How Is Interest Calculated On Credit Cards?

by Violet WillettSeptember 16, 2021
How Is Interest Calculated On Credit Cards?

Interest rates on credit cards can be as high as 29.99%, but they're not always the case! There are some hidden perks that come with a higher rate of interest, such as balance transfers or cash advances in order to bridge an emergency fund shortfall - so check first before applying these types of loans.

How to calculate credit card interest

  1. APR to daily rate conversion.
  2. Calculation of average daily balance
  3. Calculate your interest charges

APR to daily rate conversion.

Interest on a credit card is compounded daily, meaning that the interest will be added to your original balance at the end of every day. This means that if you have $1 million in debt and are paying a 15% annual percentage rate (APR), by today’s standards it has grown to more than one billion dollars because tomorrow's payment includes both principal AND accumulated interest from previous days!

You can find out whether or not this happens just by looking through your agreement; there might even mention something about how they calculate balances below those tables where all rate sheet list their fees etcetera

Calculation of average daily balance

If you have no balance from the prior billing cycle and didn't make any payments during your current cycle, then it's a bit easier. All that needs to be done is divide by 25 days in order for each one of those calculations (new payment or leftover amount) can be accounted off per day.

Calculate your interest charges

Now that you've found your average daily balance and rate, it's time to calculate interest charges. To do this multiply one by the other then multiplying both numbers by how many days are in a billing cycle. The key is always being mindful of what type or amount they're going over so as not to mistake small amounts for high-cost items later down the line.

Your credit card can be a costly mistake if you don't pay off the full balance each month. Interest charges on an average daily balance method compound and accumulate every day, based on rates set by lenders in their agreement with banks or other financial institutions where they perform funding functions like securitization services.

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