It can be quite shocking to suddenly realize how much you are being charged in interest suddenly. It can be even more surprising if you look at it over 12 months. With the average American household paying over $1,000/year in interest alone, it is vitally important that every credit card consumer knows precisely how much they are paying in interest.
What Is Interest?
Credit card interest is simply the amount of money a bank charges for access to a credit line. It is calculated differently for different items. Rates can vary considerably depending on what kind of credit you are using.
Out of all of the different credit types used in the economy, credit cards typically require you to pay the highest amount of interest. They are also usually offered at a variable rate (APR), which means they fluctuate over time with the markets. Rates can be wildly different from person to person. The interest rate you pay is typically based on your creditworthiness. So the higher your credit score is, the lower your APR.
How Do I Find Out How Much I’m Paying
Many consumers only pay attention to the APR on their accounts when they sign up for a new one. Then they get a sticker shock months or years later. Your credit card statement clearly shows how much you are charged month to month but rarely gives you any indication of how that figure is calculated.
Thankfully the process to calculate your credit card interest is very straightforward. All you need is your statement and a calculator.
How to Calculate Your Credit Card Interest.
1. Figure out what your APR means to you daily.
This is called the Daily Rate. Interest is compounded daily rather than based on your balance at the end of the month. No, your credit card company isn’t adding charges to your account every single day. Interest is still added in one lump sum at the end of the month but its compounded interest.
2. Find your average daily balance
Make a note of each day of your billing cycle and the balance on that day. Remember, you pay the same compounded interest on the old balance as you do on any new charges. Then add the balances from each daily total, subtract any payments made, and then divide by the total number of days in your cycle
For example, if your cycle has 22 days: day1+day2+day3+…divided by 22days= average daily balance. Be sure to include the amount carried over from your prior billing cycle.
3. Calculate your Interest
Calculate your interest by multiplying the average daily balance by the daily rate. Then you multiply by the number of days in your billing cycle. That final total is your average amount of interest.
Learning how to calculate the interest on your accounts can help you catch potential mistakes. It can also make you aware of exactly how much your credit accounts are costing you. Staying aware of all of your accounts is a vital part of managing your money effectively.
