How Does Credit Card Interest Work?

Paying Credit Card Bill

If you’re like half of America’s credit card users, you carry a balance on your credit card at least some of the time. If so, then you’ve noticed interest charges on your statement. You may be wondering, “How does credit card interest work?” Understanding what interest is and how it’s calculated can help you keep your finances balanced, so you can avoid unexpected fees that could derail your budget.

What is Interest?

In simplest terms, interest is the fee you pay your credit card company for the use of their money. If you pay your balance in full every month, that fee could be $0. However, if you carry a balance, those fees could be extensive.

How is Interest Calculated?

Calculating your credit card interest isn’t difficult if you have three important pieces of information:

  • Annual Percentage Rate
  • Average Daily Balance
  • Compounding Schedule

Begin by converting your annual percentage rate (APR) to a daily rate. For example, if your annual interest rate is 18 percent, you’ll divide that by 365 to find the daily periodic rate of .049 percent.

Next, you’ll determine your average daily balance. Using your statement, write down each day’s total balance, including any carryover from the previous month. Add all these daily balances together then divide by the number of days in your billing cycle. This number will be your daily average.

Finally, multiply your daily average by the daily rate to find the daily interest, then multiply that by the number of days in your cycle. In our example, we’ll assume you had a daily average of $500. If we multiply that amount by .049 percent, we’ll get an average daily interest of .245 or almost a quarter. Multiplied by a 30-day cycle, that gives you a monthly interest charge of about $7.35.

How to Reduce Your Interest Payments

Now that we’ve answered the question, ‘How does interest work?’ let’s talk about reducing yours. There are a few things you can do to save money when using your credit cards, including:

Get More Information & Tips from Xpress Cash!

With a little planning on your part, you can reduce what you pay for credit and save more money for the things you really want in life. Contact Xpress Cash to speak to a financial consultant and see how we can help you save even more. We operate from three branches in Michigan, Idaho, and Wisconsin.