Credit Card APR Calculator
Calculate the specific interest charges based on your balance and card APR.
Understanding Credit Card APR
The Annual Percentage Rate (APR) on a credit card represents the yearly cost of borrowing funds. However, credit card companies do not apply this rate once a year. Instead, they use it to calculate a "Daily Periodic Rate" (DPR), which is applied to your balance every single day of your billing cycle.
How is Credit Card Interest Calculated?
To find out how much you are actually paying in interest, you can follow these mathematical steps:
- Find the Daily Periodic Rate: Divide your APR by the number of days in the year (usually 365). For example, if your APR is 24%, your DPR is 0.24 / 365 = 0.000657.
- Calculate Average Daily Balance: This is the sum of your balance at the end of each day in the billing cycle, divided by the number of days in the cycle.
- Multiply by Days: Multiply your Average Daily Balance by the DPR, and then by the number of days in your billing cycle.
Example Calculation
Suppose you have a credit card with an APR of 21% and an average daily balance of 1,200 over a 30-day billing cycle.
- Daily Periodic Rate: 0.21 / 365 = 0.00057534
- Interest for 1 day: 1,200 * 0.00057534 = 0.69
- Interest for 30 days: 0.69 * 30 = 20.70
In this scenario, you would be charged 20.70 in interest for that month alone.
Why APR Matters
Because credit cards typically use daily compounding, even a small difference in APR can lead to significant costs over time. If you carry a balance from month to month, the interest is added to your principal balance, meaning you pay interest on your interest in the next billing cycle. This is why paying more than the minimum payment is crucial for debt reduction.