It’s no secret that credit cards are one of the most popular ways to buy things these days, but did you know that many people still don’t know how to calculate credit card interest? If you’re one of them, this article is going to help you to understand the basics of credit card interest. Credit card interest usually applies if you carry a balance over from one billing cycle to the next or you pay less than the full amount due each month.
What is credit card interest?
Simply put, interest on credit cards refers to the amount of money you’ll be paying to your credit card issuer at the end of your billing cycle after you’ve finished making your purchases with your credit card.
Let’s start with the basics; Interest on credit cards refers to what you’re charged by your card issuer for carrying a balance. If you don’t pay off your balance in full, interest charges accrue, which means you end up paying even more money for your purchases. You want to be as diligent as possible when it comes to paying off your balance.
How does credit card interest work?
Interest on credit cards (also known as an annual percentage rate or APR) works differently than interest on a loan or line of credit. You see, loan interest tends to be calculated at a flat rate over time. Interest on your credit card, however, tends to accrue throughout your billing cycle based on how much you owe and whether your balance stays above or falls below a minimum payment amount. Interest accrues both when you charge purchases to your card and when you carry a balance from one month to another.
How is credit card interest calculated?
Here is a simple formula to help you understand how the credit card interest is calculated.
Step 1: Divide Annual percentage rate by 365.
Step 2: Add all the daily balances and divide it by the number of days in the billing period.
Step 3: multiply your average daily balance by your daily interest rate, and then multiply that number by the number of days in the billing period.
In summary, interest on credit cards really boils down to simple math. Understanding how your credit card works, in addition to how much you’re spending and when you pay it off, will help you make informed financial decisions. Using a credit card doesn’t mean you can’t be frugal; if used responsibly, credit cards can actually help increase your savings. In fact, if you use your card just right, it might even earn you free rewards!