How Credit Card Interest is Calculated

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There is no simple way to calculate interest on credit cards. There are different values that come into play:

• Outstanding balance from the month before
• Annual Percentage Rate of your credit card
• Number of days in a month your credit card is calculated over
• Number of days in a year your credit card is calculated over
• Your Monthly Payment amount

For the calculations below, I’m just going to take a snapshot in time, so that it doesn’t take into account your monthly payments and compound interest. Essentially, I’m trying to give you a simpler view so that it’ll be easier to digest how much money you will be burning on interest on a daily, monthly, and annual basis.

The below examples will use the following values:

• Annual Percentage Rate = 10%
• Outstanding Balance = $5000
• Days per Month = 30
• Days per Year = 365

Formula to calculate daily credit card interest accrued:

• ((Annual Percentage Rate/100)/Days per Year) * Outstanding Balance = Daily Interest
• Example: ((10/100)/365) * 5000 = $1.37

Formula to calculate monthly credit card interest accrued:

• ((Annual Percentage Rate/100)/Days per Year) * Outstanding Balance * Days per Month= Monthly Interest
• Example: ((10/100)/365) * 5000 * 30 = $41.10

Formula to calculate annual credit card interest accrued:

• Outstanding Balance * (Annual Percentage Rate/100) = Annual Interest
• Example: 5000 * (10/100) = $500.00

Related posts:

1. What Are The Benefits to Calculating Your Daily Interest Rate?
2. What is the Credit Card Act of 2009?

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