How Credit Card Interest Work

This article is all about how does credit card interest rate work on the credit card. Credit cards are one of those things that you might use every day without fully understanding the details of how they work. Particularly how your interest charge is calculated each month.

Remember you don’t owe any interest at all as long as you pay off your statement balance in full every month. But if you can’t afford to pay off the statement balance in full you’ll be charged some amount of interest.

How a credit card cycle bill

Let’s suppose you start the billing cycle with $700 on your credit card. This is through an extra simplified calculation of how your interest is calculated.

Suppose you keep the $700 balance on your credit card the whole month and never use it. Pull out your rates and fees table that you got with your credit card and find your APR. Write this down.

In this case, this card was 23.99%, but that is your annual percentage rate. if you’re trying to calculate the interest, you owe in one month, you can approximate it by taking your annual percentage rate and dividing it by 12. So it’s about 1.99% each month.

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So if I take my $700 multiply it by the interest rate for that period. One month I get $13.98 of interest, this is a rough estimate you have to go down to the daily level. Take your 23.99% APR divide it by 365 the number of days in the year. This gives you your daily periodic interest rate in a month with 31 days.

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My $700 balance time is my daily rate is 14.26 cents. This is slightly higher than 1398 I got with my estimation method. That’s because there are 31 days in this days in a month with only 30 days or 28 days. The interest owed would be even less remember you’re paying interest for the privilege of holding that debt over time. how does credit card interest rate work on credit card

So if you hold that debt for 31 days, you owe a little bit more interest than if you only hold it for 30 days.

Let’s take a more realistic example. Suppose I start with a $700 balance on my card but then on day 6, I make a $69 charge at the grocery store. Now my balance is higher than $769.45, then maybe I fill up with gas on day 12, I go out to eat on day 17, I buy a gift for my wife on day 21. Now I’m up at a balance of $852 later in the month maybe around this point is when my payment was due from the previous month.

So I’ve made a payment of say $300 on day 26. This lowers my balance to only $552 in one penny.

This is a much more realistic example of typical credit card usage. Now, calculating your interest charge for this month comes down to the average daily balance.

Let’s imagine pushing them out if you calculated it out. You’ve got many more days at $700 instead of higher values so your average daily balance actually drops. This means you’ll pay less interest. It actually matters what day you make charges on your card.

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How does credit card interest rate work and calculated and charged? Now I cannot recommend enough to never pay a dime of interest in your life by always paying off your statement balance in full every single month. Then you won’t even have to worry about what your APR is or how interest is calculated.

Updated: July 4, 2021 — 2:29 pm

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