How Do You Calculate Credit Card Interest?

It is important to know the annual percentage rate for every credit card. For example, if consumers leave balances on their credit cards each month, they will pay the price of the items purchased and the interest. By determining the daily periodic rate on their credit cards, consumers can determine precisely how much they are paying in interest. This is helpful information because they can use it to determine which credit card balances they need to pay off first.

Calculate interest in the following three steps:

Step 1: Convert the Annual Interest Rate into the Daily Interest Rate.

The interest rate on a credit card is the “annual interest rate” or APR. Since credit card issuers will need to calculate the daily interest rate, they will divide the APR by 365. This is known as the “periodic interest rate” or the “daily periodic rate.”

Step 2: Find Out the Average Daily Balance.

First, the card issuer determines the previous month’s unpaid balance. Each day that people make purchases on their cards, their balances increase. The consumer needs to write down each day’s balance during the billing period. Then, the consumer must add all of these daily balances and then divide this number by the number of days within the billing period. This is going to be the “average daily balance.”

Step 3: Calculate the Interest.

Consumers multiply the average daily balance by the daily rate in this last step. Then, they will multiply this number by the number of days in the billing period.

After performing these calculations, a consumer may come up with a different number than the credit card issuer. That will be because the card issuer will either compound the interest daily or monthly. When a card issuer compounds the interest, the card issuer is adding the interest to the consumer’s balance. It is essentially interest on top of interest.

Compounding is the reason that consumers may be paying more than their APRs. For example, the consumer’s average daily balance was equal to $1,000. The bank charges an 18% interest rate at the end of the year so that the consumer pays $180. If the interest is compounded, the amount would be $195.

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How to Avoid Interest

According to the experts at SoFi, consumers can eliminate their interest payments. Credit card issuers charge interest on purchases when the consumer doesn’t pay the balance in full at the end of the month. However, they can avoid making these interest payments if they pay their balances before the due date. 

When they do this, they are not charged interest on their purchases. However, if people have to leave a balance at the end of the month, the best plan is to apply for a credit card with a low interest rate.

People can find a credit card interest calculator on SoFi’s website. They only need to input the credit card balance, the credit card’s interest rate, the total monthly payment and press “calculate.” Then, they will learn how much they will pay in interest.

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