Credit cards offer convenience and purchasing power, but they come with the potential for interest charges if you don't pay your balance in full by the due date. Understanding how these fees are calculated is crucial for managing your finances effectively and avoiding unnecessary costs.
How is Credit Card Interest Calculated?
The interest you pay on a credit card is typically calculated using your Average Daily Balance and the Daily Periodic Rate. Here's a breakdown of the process:
Annual Percentage Rate (APR): This is the yearly interest rate charged by the credit card company. It's usually expressed as a percentage.
Daily Periodic Rate (DPR): To calculate interest on a daily basis, the APR is divided by the number of days in the year (usually 365).
Daily Periodic Rate = Annual Interest Rate / 365
Average Daily Balance (ADB): This is the average amount you owed on your credit card each day during the billing cycle. It's calculated by summing up your ending balance for each day of the billing period and dividing by the number of days in that period. For simplicity in this calculator, we use your current balance as a proxy for the average daily balance over the specified payment period.
Interest Calculation: The interest fee for a specific period is calculated by multiplying the Average Daily Balance by the Daily Periodic Rate and then by the number of days in the period.
Interest Fee = Average Daily Balance * Daily Periodic Rate * Number of Days in Period