Tips on how to calculate credit card interest
Have you ever wondered exactly how much interest your paying for your credit cards each month?
The best way to go about not getting any unnecessary charges on your credit card is to understand exactly how they work and how much you really should be shelling out each month.
Here is the information that you need to do so:
What are interest rates?
Each of the purchases that you make with your credit card is subject to an interest rate called Annual Percentage Rate or APR.
The amount of your card’s APR will depend on the type of card that you get and on your credit score. Although it is based on the period of a year, this is what credit card companies use to charge you monthly.
The interest rate that you get also depends on the features of your credit card. Most of the time, rewards cards cost more than your standard personal credit card with an average of about 14% purchase rate whereas rewards cards can average about 19%.
For business cards, these can be higher with non-rewards credit cards having an average purchase rate of about 18% and rewards cards averaging 19%.
How do interest in credit cards work?
The only time that the interest rates in your credit card will be of any significance to you is if you don’t pay for a month’s bill in full.
The moment that your credit card balance carries over to the next month, this is the only time that the credit card company will charge you interest.
Naturally, paying for your monthly bill in full is the best way to avoid these charges but a low-interest credit card is another way to save.
How to calculate credit card interest
You can easily calculate your credit card interest in a few simple steps. You don’t even have to be much of a numbers person to be able to do so. All you need to do is follow these steps:
Break down your Annual Percentage Rate
You’ll find your interest rate in your statement under APR. Since interest is usually calculated on a daily basis, you will then have to divide your APR by 365. The result would amount to your daily periodic rate.
Know your average daily balance
Your average daily balance is the amount of balance that you have each day over a single billing period. You’ll find this by getting your unpaid balance from the previous month and adding it to the total balance of the purchases you’ve made recently. Then this total will be divided by the number of days in that billing period.
Combine them all together
Now once you get those numbers, multiply your daily rate by your average daily balance. Then multiply them again with the number of days of your billing period. This will show you exactly how much you will be needing to pay for each month. Of course, this is subject to added costs if your credit card company compounds interest rates.
Compounding is when a credit card company adds the interest of your unpaid balance from last month to the balance that you have this month. This means that you are paying interest on the interest that you’ve already had. This is also one of the main reasons why most people pay more interest than what their APRs usually state.
How to lower your credit card’s interest rate
One of the best ways that you can actually avoid your credit card’s interest rate altogether is by paying off your monthly balance in full since they only charge you interest if your balance carries over the next month. But this method can be quite impossible for some people. So here are a few ways that can help you lower your monthly interest rates:
- Pay your bills more than once a month. If you do so, you will be able to lessen your average daily balance making what you’ll really need to pay in interest actually lower than just paying your bill once for that billing period. Let’s say that you have $1,000 to pay for your balance this month. If you divide that payment into two for the billing period, paying one earlier in the month, the interest that you will need to pay for the remaining balance will decrease significantly.
- Pay for more than the minimum payment. If you can’t really afford to pay for the whole of your credit card’s monthly bill, the next best thing is to pay for as much of it as you can. This will impact greatly on whether or not you will have to pay a higher interest rate for your next billing period. If you can’t avoid getting some interest, it is better to have as little of it as you can.
- Consolidate your debt. This is a method that works well for you if you have to deal with multiple credit cards with multiple APRs. Consolidating debt means taking out a loan to pay for your bills all at once and just having to deal with one payment with usually a lower interest rate. This not only enables you to avoid racking up more interest on your credit card statements but also helps improve your credit score immensely.
Calculating your credit card’s interest is not as difficult as most may imagine. All you need to do is understand how they work. Once you figured out exactly how much you will need to be paying as interest every month, you will then be able to make a way to reduce these additional costs further.
Being able to figure out your daily interest rate and how you can avoid it will enable you to reduce the amount of money you will have to pay each month. And as long as you are smart about your purchases and payments, you won’t have to deal with compounding interest as the months wear on.