Understanding Credit Card Interest Calculations

It seems that any time you try to find something out from the banks, they make it so difficult for you to get the information you need. This was the case when it came to writing, but perseverance is the key to eventually getting what you need.

In all honesty, the calculation of interest on an outstanding balance on a credit card is much simpler than most people think.

Here’s how it’s calculated…

First, your credit card provider does the average daily balance (ADB). In order to figure this out they must work out the total balance of each individual day in the reporting period.

Once this has been done they will total the balances of all the days and then divide by the number of days in your card’s billing period (you can find this in your monthly statement).

For example:

Say you have a card that has an interest rate of 17% and a balance of $ 500 at the beginning of the reporting period (in this case is 28 days). You went through this period without making a purchase with a credit card until the 23rd, when you made a purchase of $ 400.

This means that for 22 days the balance was $ 500 and for the remaining 6 days of your statement period your balance was $ 900.

22 x $ 500 = $ 11,000

6 x $ 900 = $ 5,400

Total = $ 16,400

ADB = Total / # of days in statement period

ADB = $ 16,400 / 28

ADB = $ 585.71

So what next?

Well, the next step is figuring out the interest that will be charged.

This is done by multiplying the ADB by the Annual Percentage Rate (APR – also known as the credit card interest rate) and the number of days in the reporting period. Then, this number is divided by 365 to take into account the fact that the interest rate is an annual percentage rate of rather than a monthly one.

For example:

(ADB x APR x 28) / no. of days in the year = Total Interest

($585.71 x 0. Interest of 17 x 28) / 365 = Total Interest

$2787.98 / 365 = $7.67

So your total interest for that reporting period would be $ 7.67

NOTE: All figures are rounded to two decimal places.

So these calculations are made on the basis of an average daily balance method with a single billing cycle. However, some providers use the method of double billing cycle, when the average daily balance is calculated over two reporting periods.

This method could end up costing you more money if the balance on your card tends to fluctuate from month to month. If this is (or could be) the case, then be sure to contact your credit card provider in order to find out how they calculate interest on their credit cards.

And remember, different expenditures have different interest rates. So you’ll have different interest totals for purchases as you would for any cash advances and balance transfers that you may have carried out.