How Credit Card Interest is Calculated

how is interest calculated on a credit card

Posted on July 1, 2010 at 5:49 am.

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

Source: calculatecreditcard.com

Category: Credit

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