How Is Credit Card Interest Calculated

Being the owner of a credit card and in case you are residing in Canada or any other part of the world, you must have paid the minimum balance on the credit card of yours at least a couple of times. In these types of situations, you must have noticed that you have been charged with a certain amount of interest. What exactly is this interest and how is it possible to calculate credit card interest? We have explained all these things in detail in the following paragraphs.

What do you mean by credit card interest?

This is actually the rate which your bank or any other financial institution issuing the credit card charges on the balance amount on the credit card. This is going to be valid only when a portion of the amount or the minimum due amount is paid by you, and the monthly pending balance is not paid by you in full. In case the outstanding amount is cleared by you prior to the due date, the bank won’t be charging any interest. It is important for you to be aware of the rate of interest on the credit card of yours prior to choosing one. The bank might offer you a lower rate of interest as well, which will depend on your credit score.

How can credit card interest be calculated?

As many as 3 steps will be required for calculating the credit card interest. In case you would like to go through the steps get hold of your credit card billing statement. Some info will be required from it.

1. The annual rate has to be converted to a daily rate

Your rate of interest will be identified as the APR (annual percentage rate) on your statement. The interest will be calculated daily, and therefore, the APR has to be converted to a daily rate. This can be done by dividing it by 365. Although certain financial institutions perform the division by 360, the difference isn’t a lot for our purposes since it will change the result marginally. This result is known as the periodic rate of interest or the daily periodic rate.

2. Figure out the average daily balance

The statement of yours will inform you regarding the days which are included in the period of billing. The interest charge will be depending on your balance every single day during that period.

You will be commencing with the balance which is unpaid – the amount which has been carried over from the last month. The balance will increase while a purchase is made by you, and it is going to go down while you are making a payment. It will be imperative to get through the period of billing by making use of the transaction info on the statement, and you must jot down the balance of each day.

Once this has been done, all the day-to-day balances have to be added up and then divided by the total days in the period of billing. The outcome is the average daily balance.

3. Put everything together

Lastly, the average daily balance has to be multiplied by the daily rate, and that result has to be again multiplied by the total days in the period of billing.

It is possible for the actual rate of interest to differ slightly from the amount calculated which will depend on whether interest is compounded by the issuer monthly or daily. Compounding means the procedure of appending the interest accrued into the unpaid balance of yours such that interest will be paid by you on interest.

You might be paying in excess of your APR in interest because of compounding. For instance, take for granted that your daily balance on average was $1000 for the whole year. You would pay $180 in case your bank had an interest rate of 18% just once while the year comes to an end. However, you will be paying something close to $195 since your interest is compounded.

How is credit card interest going to work?

Interest will be charged by the issuers of the credit card only if a balance is carried by you from one particular month to the subsequent one. In case your balance is paid every month in full, your rate of interest becomes irrelevant since you will not be charged any interest whatsoever. Of course, the most affordable way to go will be to pay in full; however, in case you carry a balance on most occasions, you will be able to save money on interest because of a credit card of low interest.

This calculation will urge you to minimize your rate of interest by paying two times a month instead of once. This additional payment will help to reduce your daily balance along with your interest. Suppose you have a balance of $2000 and are going to have $1000 put toward the credit card bill. In case $1000 is paid by you on the twentieth day of a billing period of 30 days, the average daily balance will be around $1633. On the other hand, in case $500 is paid by you on the tenth day and $500 on the twentieth day, the average daily balance will be $1467. In this way, it will be possible to reduce the interest charge by around 10%.

You might be having different APRs depending on the credit card for various types of transactions like balance transfers, cash advances, and purchases.

How is it possible to lower the interest rate of my credit card?

You will be able to control some factors determining the interest rate of your credit card. In case your credit score is better, you will be getting better options for your credit card. If there is a significant improvement in your score, you might request the issuer for a reduced rate. However, it will be feasible to reduce the interest rate in a number of ways mentioned below irrespective of the mentioned APR on the credit card:

• Your bill has to be paid every month in full so as to avoid any interest.

• In case you are not able to pay the bill in full, try to make in excess of the minimum payment.

• Pay at least a couple of times every month for reducing the average daily balance.

After going through these above-mentioned details, you should be much better equipped for taking charge of your interest.

293