Budgeting & Debt
How To Calculate Credit Card Interest
Credit card interest is charged on the balance every day, then billed monthly. Converting the annual APR into a monthly and daily figure shows how much of a payment is consumed before a single dollar of principal is repaid.
Quick Answer
Monthly = Balance x APR / 12; Daily = Balance x APR / 365
- Balance
- Amount currently owed
- APR
- Annual percentage rate on the card
- Monthly
- Interest charged for one month
- Daily
- Interest accrued each day
Divide the annual APR by twelve for the monthly charge and by 365 for the daily one. A 5,000 balance at 22.9 percent costs about 95.42 a month, roughly 3.14 a day and about 1,145 over a year if the balance never moves.
What Is Credit Card Interest?
Credit card interest is the charge a card issuer applies to an outstanding balance. It is quoted as an annual percentage rate but it is calculated daily and billed monthly, which is why the monthly figure is the APR divided by twelve rather than something that only appears once a year.
The APR is the yearly rate stated on the statement. It varies with the card, the issuer and the borrower's credit history, and it is often higher on rewards cards because the rewards have to be paid for somewhere.
The monthly interest is the balance multiplied by the APR and divided by twelve. On a five thousand dollar balance at twenty-two point nine percent that is about ninety-five dollars, which is the number most people are surprised by.
The daily interest is the balance multiplied by the APR and divided by 365. It is the more honest measure of how fast the debt grows, because the card issuer calculates the charge on the average daily balance.
The annual interest is simply the balance multiplied by the APR. It is what the same balance would cost over a full year if nothing changed, and it is the figure that makes the cost of carrying a balance unmistakable.
Interest compounds in the sense that unpaid interest becomes part of the balance, so the next month's charge is calculated on a slightly larger figure. The difference is small month to month but it is why a balance left untouched grows faster than a simple APR division suggests.
The grace period is the window between the statement date and the due date during which no interest is charged on new purchases, provided the previous balance was paid in full. Once a balance is carried, the grace period usually disappears and new spending starts accruing immediately.
Different balances can carry different rates. A cash advance typically has a higher APR than purchases and starts accruing from the day it is taken, with no grace period at all. Balance transfers may carry a promotional rate for a limited period.
The minimum payment is usually a small percentage of the balance, and on a high APR it can be barely more than the monthly interest. Paying only the minimum then leaves the balance almost unchanged, which is the trap the minimum is designed around.
Paying earlier in the cycle reduces the average daily balance, which reduces the interest charged. The effect is modest but real, and it costs nothing to arrange.
Comparing the APR with the return available elsewhere is the decision the number informs. Paying off a card at twenty-two percent is equivalent to earning twenty-two percent risk-free, which almost no investment offers.
The calculator models the figures entered and nothing more. It assumes the balance stays fixed and uses simple interest, so it slightly understates the cost of a balance that compounds month after month without payments.
Formula
Monthly = Balance x APR / 12
The annual rate spread over twelve months.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| B | Balance | currency | Amount currently owed. |
| r | APR | rate | Annual percentage rate as a decimal. |
Daily = Balance x APR / 365; Annual = Balance x APR
The daily accrual and the cost of a full year at the same balance.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| B | Balance | currency | Amount currently owed. |
| r | APR | rate | Annual percentage rate as a decimal. |
How To Calculate Credit Card Interest
- 1
Find the balance
Use the current statement balance, which is the amount interest is charged on.
- 2
Find the APR
The annual rate is printed on the statement. Use the purchase rate, not a promotional rate that has expired.
- 3
Divide by twelve for a month
Balance times APR divided by twelve gives the interest for one month.
- 4
Divide by 365 for a day
The daily figure shows how quickly the debt grows between payments.
- 5
Multiply by the APR for a year
The annual figure is the cost of leaving the balance untouched for twelve months.
Examples
Example 1: 5,000 balance at 22.9 percent
- Card balance
- 5,000
- Annual APR
- 22.9%
| Step | Calculation | Result |
|---|---|---|
| Monthly interest | 5,000 x 0.229 / 12 | 95.42 |
| Daily interest | 5,000 x 0.229 / 365 | 3.14 |
| Annual interest | 5,000 x 0.229 | 1145 |
| Interest as share of balance | 1,145 / 5,000 | 0.229 |
| Cost per day over a year | 1,145 / 365 | 3.14 |
Result: The balance costs 95.42 a month and 3.14 a day, which is 1145 over a year if nothing is repaid.
Example 2: A smaller balance at a lower rate
- Card balance
- 1,200
- Annual APR
- 17.5%
| Step | Calculation | Result |
|---|---|---|
| Monthly interest | 1,200 x 0.175 / 12 | 17.5 |
| Daily interest | 1,200 x 0.175 / 365 | 0.5753 |
| Annual interest | 1,200 x 0.175 | 210 |
| Interest as share of balance | 210 / 1,200 | 0.175 |
| Cost per day over a year | 210 / 365 | 0.5753 |
Result: The smaller balance costs 17.5 a month and about 0.5753 a day, which is 210 over a year.
Calculator
Monthly interest
$95.42
- Daily interest
- $3.14
- Annual interest
- $1,145.00
Values update as you type. This calculator covers the single scenario its formula assumes — see Common Mistakes for what it leaves out.
Prefer a full-width tool? Open the Credit Card Interest calculator page.
Common Mistakes
Dividing the APR by twelve for a daily figure
The daily charge is the APR divided by 365, not by twelve. Mixing the two overstates the daily cost by a factor of about thirty.
Assuming interest only appears at the statement
Interest accrues every day. The statement is simply the bill for what has already accumulated.
Ignoring the loss of the grace period
Once a balance is carried, new purchases usually start accruing interest immediately. The true cost is higher than the interest on the old balance alone.
Comparing a promotional rate with the standard rate
A zero percent balance transfer offer reverts to the standard APR when it ends. Planning around the promotional rate alone leads to a shock later.
Forgetting cash advance rates
Cash advances usually carry a higher APR than purchases and accrue from day one with no grace period. They are the most expensive way to use a card.
Treating the minimum as progress
On a high APR the minimum can be barely more than the monthly interest, so the balance hardly falls. Paying more than the minimum is what actually reduces the debt.
Overlooking the effect of compounding
Unpaid interest joins the balance, so the next month is charged on a larger figure. Simple interest slightly understates the real cost over time.
FAQ
How is credit card interest calculated?
The issuer applies the daily rate, which is the APR divided by 365, to the balance each day, then bills the accumulated charge at the statement date.
Why is the monthly interest so high?
A twenty percent APR is about one and two thirds percent a month. On a large balance that is a substantial cash amount even though the rate sounds moderate.
Does the APR change?
Yes. Cards can have variable APRs tied to a benchmark rate, and a missed payment can trigger a penalty rate. The rate on the statement is the one that applies now.
Is it better to pay the balance early in the month?
Paying earlier reduces the average daily balance, which slightly reduces the interest charged. The saving is small but it costs nothing.
What happens if I only pay the minimum?
The balance falls very slowly because most of the payment covers interest. On a high APR it can take many years to clear, at a total cost far above the original balance.
Should I pay off the card or save?
Paying off a card at twenty percent is equivalent to earning twenty percent risk-free, which almost no savings account offers. Keep a small emergency buffer, then attack the card.
References
- [1]Consumer Financial Protection Bureau, Credit card interest and APR — https://www.consumerfinance.gov/consumer-tools/credit-cards/
- [2]Federal Reserve, How credit card interest works — https://www.federalreserve.gov/credit-cards.htm
- [3]Consumer Financial Protection Bureau, Understanding credit card terms — https://www.consumerfinance.gov/ask-cfpb/category-credit-cards/