The Ultimate Guide to Credit Cards
Wednesday, April 17, 2024

How to Calculate Credit Card Interest: 3 Steps to Find Your Rate (April 2024)

How To Calculate Credit Card Interest
Eric Bank

Written by: Eric Bank

Eric Bank
Eric Bank

Eric Bank is an M.B.A. who has covered financial and business topics since 1985, appearing regularly on Credible, eHow, WiseBread, The Nest, Zacks, Chron, BadCredit.org and dozens of other outlets. Eric specializes in taking complex subject matters and explaining them in simple terms for consumer audiences, particularly in the world of personal finance. Eric holds a Master's in Business Administration from New York University and a Master's in Finance from DePaul University.

See full bio »

Edited by: Lillian Guevara-Castro

Lillian Guevara-Castro
Lillian Guevara-Castro

Lillian Guevara-Castro brings more than 30 years of editing and journalism experience to the CardRates team. She has written and edited for major news organizations, including The Atlanta Journal-Constitution and the New York Times, and she previously served as an adjunct journalism instructor at the University of Florida. Today, Lillian edits all CardRates content for clarity, accuracy, and reader engagement.

See full bio »
Advertiser Disclosure

One of the most important factors in choosing a credit card is its interest rate, and it’s also important to know how to calculate credit card interest. All credit cards must disclose their annual percentage rate, or APR, which expresses their interest rates in a single annual number. Almost all credit cards charge interest only on balances that you don’t fully pay off in the most current billing cycle. But how does APR translate into the amount of interest you’ll actually pay?

Read on to learn more about, including an in-depth look at how you can find your daily periodic rate, simple versus compound interest, how to calculate your average daily balance, and more. Or skip ahead to learn how your APR is calculated or to compare the best balance transfer offers to avoid paying interest.

Step 1: Divide APR by 360 (or 365) to Find Out Your Daily Periodic Rate

Before we can explain the first step, we should clarify a few important terms:

Grace Period: The normal billing cycle for a credit card can range from 28 to 31 days. The due date for your monthly payment is no less than 21 days after the end of the billing cycle. Each billing cycle provides a grace period, which means you don’t incur interest on purchases made within the billing cycle if you pay them in full by the due date. Your outstanding balance is the accumulated amount you haven’t paid within a grace period.

Simple Versus Compound Interest: Simple interest is the amount you pay on your outstanding balance without including the effect of compounding. Virtually all cards figure your interest with compounding, which means they add the interest you already owe to the amount subject to interest – you are paying interest on interest.

In the good old days, credit cards used monthly compounding, but the current fashion is daily or continuous compounding, which will cost you more. As an example of daily compounding, if your outstanding balance is $1,000 and the day’s interest is 71 cents, then tomorrow’s outstanding balance will be $1,000.71 (assuming no other purchases or payments).

Nominal Versus Effective APR: When you see an ad for a credit card, the interest rate is expressed as the nominal APR, which is based on simple interest and excludes fees. The more appropriate number is the effective APR, which includes the effects of compounding and any fees that are not paid separately. Some cards charge the annual fee (if any) as a lump sum, but others spread the annual fee over the entire year, making it part of the effective APR.

If possible, obtain the effective APR of any credit card you are considering. Fees for late payments or for exceeding your credit limit are not included in any APR, since they are charged separately.

To illustrate the three-step process for calculating your interest charges, imagine that you have an outstanding balance of $3,500 on a credit card with an interest rate of 25 percent.

In this example, the credit card uses a 360-day year (some cards use 365, terms will vary), so the daily percentage rate, or DPR, is equal to 25% / 360, or .06944%. This is the interest rate you pay each day on the balance subject to interest. Assuming daily compounding and no other activity, your daily balance would grow each day by the interest charged on the previous day.

Step 2: Calculate Your Average Daily Balance

The average daily balance is computed by adding together each day’s outstanding balance and dividing by the number of days in the billing period. For simplicity’s sake, we set the average daily balance to $3,500.

Step 3: (Avg. Daily Balance x DPR) x Days in the Month

Finally, we calculate the interest charged for the billing cycle, which in this example, is $3,500 x .06944% x 30 days, or $72.91. This is the amount of interest you would be charged on a card with a $3,500 balance and a 25% interest rate.

How Banks Determine Your APR

The APR on your credit card is based on the bank’s opinion of your creditworthiness, which is in large part derived from your credit score. Most banks use FICO credit scores, which range from 300 (the worst) to 850 (the best).

Each of the three major credit bureaus, Equifax, Experian, and TransUnion figure their FICO scores a little differently, but the scores tend to cluster closely. Interpretations differ, but generally, 700 is considered the dividing line between good and fair scores. The lower the score, the higher APR you’ll pay. If your score is too low, you could have difficulty qualifying for any credit at all.

Sometimes, banks will take into account other factors when determining your APR, such as black marks on your credit history (bankruptcies, court decisions, garnished wages, etc.). You will save money on interest if you can raise your FICO score – check out the myFICO website for tips on how to do that.

Delay Interest Payments with a Balance Transfer Offer

Many credit cards offer special balance transfer deals that can save you money. In a balance transfer, you move your outstanding balance from one credit card to another. To entice new customers, the balance transfer offers usually include a set number of months during which you don’t owe any interest on the transferred amount.

Some of the best balance transfer offers grant interest-free periods of 15 or even 21 months. In addition, some cards will also grant a multi-month grace period on new purchases made after you transfer a balance. If you combine that with a zero-percent annual fee and a reasonably low APR, you have the makings of a great credit card. Here are some of our favorites:

0% BALANCE TRANSFER RATING

★★★★★
4.8

OVERALL RATING

  • 0% Intro APR for 21 months on balance transfers from date of first transfer and 0% Intro APR for 12 months on purchases from date of account opening. After that the variable APR will be 18.24% - 28.99%, based on your creditworthiness. Balance transfers must be completed within 4 months of account opening.
  • There is a balance transfer fee of either $5 or 5% of the amount of each transfer, whichever is greater
  • Get free access to your FICO® Score online.
  • With Citi Entertainment®, get special access to purchase tickets to thousands of events, including concerts, sporting events, dining experiences and more.
  • No Annual Fee - our low intro rates and all the benefits don’t come with a yearly charge.
Intro (Purchases)
Intro (Transfers)
Regular APR
Annual Fee
Credit Needed
0% 12 months on Purchases
0% 21 months on Balance Transfers
18.24% - 28.99% (Variable)
$0
Excellent, Good

Additional Disclosure: Citi is a CardRates advertiser.

Discover it® Balance Transfer Review

at Discover Card'ssecure website

0% BALANCE TRANSFER RATING

★★★★★
4.8

OVERALL RATING

  • INTRO OFFER: Unlimited Cashback Match for all new cardmembers – only from Discover. Discover will automatically match all the cash back you’ve earned at the end of your first year! There’s no minimum spending or maximum rewards. You could turn $150 cash back into $300.
  • Earn 5% cash back on everyday purchases at different places you shop each quarter like grocery stores, restaurants, gas stations, and more, up to the quarterly maximum when you activate. Plus, earn unlimited 1% cash back on all other purchases—automatically.
  • Redeem your rewards for cash at any time.
  • Your account may not always be eligible for balance transfers. Balance transfer eligibility is determined at Discover’s discretion.
  • Discover could help you reduce exposure of your personal information online by helping you remove it from select people-search sites that could sell your data. It’s free, activate with the mobile app.
  • No annual fee.
  • Terms and conditions apply.
Intro (Purchases)
Intro (Transfers)
Regular APR
Annual Fee
Credit Needed
0% Intro APR for 6 months
0% Intro APR for 18 months
17.24% - 28.24% Variable APR
$0
Excellent/Good

0% BALANCE TRANSFER RATING

★★★★★
4.8

OVERALL RATING

  • Earn $200 cash back after you spend $1,500 on purchases in the first 6 months of account opening. This bonus offer will be fulfilled as 20,000 ThankYou® Points, which can be redeemed for $200 cash back.
  • Earn 2% on every purchase with unlimited 1% cash back when you buy, plus an additional 1% as you pay for those purchases. To earn cash back, pay at least the minimum due on time. Plus, for a limited time, earn 5% total cash back on hotel, car rentals and attractions booked on the Citi Travel℠ portal through 12/31/24.
  • Balance Transfer Only Offer: 0% intro APR on Balance Transfers for 18 months. After that, the variable APR will be 19.24% - 29.24%, based on your creditworthiness.
  • Balance Transfers do not earn cash back. Intro APR does not apply to purchases.
  • If you transfer a balance, interest will be charged on your purchases unless you pay your entire balance (including balance transfers) by the due date each month.
  • There is an intro balance transfer fee of 3% of each transfer (minimum $5) completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5).
Intro (Purchases)
Intro (Transfers)
Regular APR
Annual Fee
Credit Needed
N/A
0% Intro APR Period 18 months on Balance Transfers
19.24% - 29.24% (Variable)
$0
Excellent, Good, Fair

Additional Disclosure: Citi is a CardRates advertiser.

Bank of America® Customized Cash Rewards credit card Review

at Bank Of America'ssecure website

0% BALANCE TRANSFER RATING

★★★★★
4.7

OVERALL RATING

  • $200 online cash rewards bonus after you make at least $1,000 in purchases in the first 90 days of account opening.
  • Earn 3% cash back in the category of your choice, automatic 2% at grocery stores and wholesale clubs (up to $2,500 in combined choice category/grocery store/wholesale club quarterly purchases) and unlimited 1% on all other purchases.
  • Choose 3% cash back on gas and EV charging station, online shopping/cable/internet/phone plan/streaming, dining, travel, drug store/pharmacy or home improvement/furnishing purchases.
  • If you're a Bank of America Preferred Rewards® member, you can earn 25%-75% more cash back on every purchase. That means you could earn 3.75%-5.25% cash back on purchases in your choice category.
  • No annual fee and cash rewards don’t expire as long as your account remains open.
  • 0% Intro APR for 15 billing cycles for purchases, and for any balance transfers made in the first 60 days. After the Intro APR offer ends, a Variable APR that’s currently 18.24% - 28.24% will apply. A 3% Intro balance transfer fee will apply for the first 60 days your account is open. After the Intro balance transfer fee offer ends, the fee for future balance transfers is 4%.
  • Contactless Cards - The security of a chip card, with the convenience of a tap.
  • This online only offer may not be available if you leave this page or if you visit a Bank of America financial center. You can take advantage of this offer when you apply now.
Intro (Purchases)
Intro (Transfers)
Regular APR
Annual Fee
Credit Needed
0% Intro APR for 15 billing cycles for purchases
0% Intro APR for 15 billing cycles for any balance transfers made in the first 60 days (Balance Transfer Fee 3% for 60 days from account opening, then 4%)
18.24% - 28.24% Variable APR on purchases and balance transfers
$0
Excellent/Good

Additional Disclosure: Bank of America is a CardRates advertiser.

Bank of America® Travel Rewards credit card Review

at Bank Of America'ssecure website

0% BALANCE TRANSFER RATING

★★★★★
4.7

OVERALL RATING

  • Earn unlimited 1.5 points per $1 spent on all purchases, with no annual fee and no foreign transaction fees and your points don't expire as long as your account remains open.
  • 25,000 online bonus points after you make at least $1,000 in purchases in the first 90 days of account opening - that can be a $250 statement credit toward travel purchases.
  • Use your card to book your trip how and where you want - you're not limited to specific websites with blackout dates or restrictions.
  • Redeem points for a statement credit to pay for travel or dining purchases, such as flights, hotel stays, car and vacation rentals, baggage fees, and also at restaurants including takeout.
  • 0% Intro APR for 15 billing cycles for purchases, and for any balance transfers made in the first 60 days. After the Intro APR offer ends, a Variable APR that’s currently 18.24% - 28.24% will apply. A 3% Intro balance transfer fee will apply for the first 60 days your account is open. After the Intro balance transfer fee offer ends, the fee for future balance transfers is 4%.
  • If you're a Bank of America Preferred Rewards® member, you can earn 25%-75% more points on every purchase. That means instead of earning an unlimited 1.5 points for every $1, you could earn 1.87-2.62 points for every $1 you spend on purchases.
  • Contactless Cards - The security of a chip card, with the convenience of a tap.
  • This online only offer may not be available if you leave this page or if you visit a Bank of America financial center. You can take advantage of this offer when you apply now.
Intro (Purchases)
Intro (Transfers)
Regular APR
Annual Fee
Credit Needed
0% Intro APR for 15 billing cycles for purchases
0% Intro APR for 15 billing cycles for any balance transfers made in the first 60 days (Balance Transfer Fee 3% for 60 days from account opening, then 4%)
18.24% - 28.24% Variable APR on purchases and balance transfers
$0
Excellent/Good

Additional Disclosure: Bank of America is a CardRates advertiser.

+See more balance transfer cards

Pay Your Balance in Full to Avoid Interest Altogether

Now that you know how interest is calculated, you can follow this strategy to lower your interest expenses:

  1. Improve your credit score
  2. Shop around for a credit card that combines the lowest effective APY with the best balance transfer program
  3. Transfer debt from other credit cards to your new one
  4. Pay down your credit card debt during the 0% interest intro period of your balance transfer
  5. Avoid accumulating outstanding balances in the future

For almost all credit cards, you’d never shell out any interest if you paid off your balance in full each month. However, some credit cards do not provide grace periods, so it’s worth the extra effort to look into this before applying. One other point – cash advances incur interest immediately and never have a grace period, so if you’re looking to avoid interest, that may not be the route for you.

Advertiser Disclosure

CardRates.com is a free online resource that offers valuable content and comparison services to users. To keep this resource 100% free, we receive compensation for referrals for many of the offers listed on the site. Along with key review factors, this compensation may impact how and where products appear across CardRates.com (including, for example, the order in which they appear). CardRates.com does not include the entire universe of available offers. Editorial opinions expressed on the site are strictly our own and are not provided, endorsed, or approved by advertisers.