## How Credit Card Interest is Calculated

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

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

## What Are The Benefits to Calculating Your Daily Interest Rate?

After I created the “Calculate Your Daily, Monthly, and Annual Credit Card Interest” page, I was asked numerous times, why did you specifically decide to create that tool and what purpose does it serve? Well, I guess my brief intro on the homepage was a bit too brief. Let me elaborate.

Around the time I created that automated form, I was actually trying to make the decision of whether or not it’d be worth my effort to transfer my credit card debt into another credit card. I had multiple 0% balance transfer offers on existing cards, but knew better than to think it was a no-brainer decision, since there’s always a transfer fee associated with them.

The first step I took was to calculate how much interest I was losing per month. The idea was that the one time balance transfer fee may equate to be about three months worth of interest, in which case I could potentially pay off within two months. If that were the situation, then I would be wasting time calling up their customer service to perform the transfer. Not to mention, it’s just a dumb decision to pay more in the long run.

Once I got the formula to calculate the monthly interest rate and determined it was a good idea to perform the transfer, it dawned on me that it’d be extremely interesting to figure out how much I was “spending” by carrying this balance for so long. Of course my balance fluctuated throughout the months and years, but I just had to simplify my decision making process by fixing the balance to the amount at the time. What I discovered was pretty eye opening the moment I saw it.

I believe my daily interest came out to be about \$1.25, that like one item from the McDonald’s Dollar Menu (plus tax). But, I haven’t been eating at McDonald’s and a side salad sounded pretty good at the time. Then, I thought, what if I escalated the calculation to a week? It came out to be \$8.75. That equated to about 3 gallons of gas for my car. And what the heck? I’m always filling up my tank. That extra money would come in really handy!

Essentially, it put the money I was spending on credit card interest into perspective. Seemingly small amounts really add up and I couldn’t believe it. At that point, I made it a goal of mine to erase my credit card debt as soon as possible. So, my purpose of the form is mainly to provide people, in a similar situation that I was in, some perspective. It’s extremely important to manage your money (especially for kids) and figure do what you can to lower/extinguish your credit card debt.

I truly hope some people out there who have used my form realized the same lesson I did. For those who are severe bad credit situations, I recommend determining and monitoring your credit score first to determine how deep you’re in it and then just work your way up.