The Ultimate Guide to Credit Cards
Friday, August 16, 2024

# How to Calculate Credit Card Interest: 3 Steps to Find Your Rate (Aug. 2024)

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:

### Citi® Diamond Preferred® Card

★★★★★

#### OVERALL RATING

4.5/5.0
• 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
• 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

### Discover it® Chrome

at Discover Card'ssecure website

★★★★★

#### OVERALL RATING

4.8/5.0
• 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. Just a dollar-for-dollar match.
• Earn 2% cash back at Gas Stations and Restaurants on up to \$1,000 in combined purchases each quarter, automatically. Plus earn unlimited 1% cash back on all other purchases.
• Get a 0% intro APR for 18 months on balance transfers. Then 18.24% to 28.24% Standard Variable APR applies, based on credit worthiness.
• Redeem your rewards for cash at any time.
• 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
18.24% - 28.24% Variable APR
\$0
Excellent/Good

### Citi Double Cash® Card

★★★★★

#### OVERALL RATING

4.8/5.0
• 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

### Bank of America® Customized Cash Rewards credit card

at Bank Of America'ssecure website

★★★★★

#### OVERALL RATING

4.9/5.0
• \$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/furnishings 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 19.24% - 29.24% 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%)
19.24% - 29.24% Variable APR on purchases and balance transfers
\$0
Excellent/Good

### Bank of America® Travel Rewards credit card

at Bank Of America'ssecure website

★★★★★

#### OVERALL RATING

4.9/5.0
• 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 19.24% - 29.24% 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%)
19.24% - 29.24% Variable APR on purchases and balance transfers
\$0
Excellent/Good

+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: