Understanding how your credit card's annual percentage rate (APR) is calculated and applied to your outstanding balances is crucial to maintaining control over the growth of your overall credit card debt.
How does APR work on a credit card?
Your credit card's APR is the interest rate you are charged on any unpaid credit card balances you have every month.
Your monthly statement may break down your credit card APR yearly, but you can break it down to a monthly APR yourself. This information could help you make decisions about which credit cards you may want to focus on paying down quickly (if they are costing you too much in daily interest), and how much it is costing you each day to borrow from your credit card company. Monthly APR can also help you understand how much it is costing you to carry an unpaid balance each month.
Below, you will find steps and formulas for calculating both your daily and monthly percentage rates, which are based on your APR, and how they are applied to your balances.
When do you have to pay APR?
If you are carrying a credit card balance, you will be charged interest at a rate that is calculated and determined by your credit card issuer. The three main types of APR are:
- Fixed rate
- Variable rate
- Promotional rate
With fixed rates, your APR is likely to stay the same throughout the time you have your card unless otherwise stated. Variable rates may increase or decrease depending on federal rates. Promotional rates include zero-interest or low-interest periods offered as introductory incentives by credit card companies.
You'll know which rates are associated with your credit card by checking your card member agreement and monthly credit card statements.
How do I calculate my monthly APR?
Calculating your monthly APR rate can be done in three steps:
Step 1: Find your current APR and balance in your credit card statement.
Step 2: Divide your current APR by 12 (for the twelve months of the year) to find your monthly periodic rate.
Step 3: Multiply that number with the amount of your current balance.
For example, if you currently owe $500 on your credit card throughout the month and your current APR is 17.99%, you can calculate your monthly interest rate by dividing the 17.99% by 12, which is approximately 1.49%. Then multiply $500 x 0.0149 for an amount of $7.45 each month. Therefore, you should have been charged $7.45 in interest charges based on your $500 balance.
How do I calculate my daily APR?
Your credit card company may calculate your interest with a daily periodic rate. Calculate your daily APR in three steps:
Step 1: Find your current APR and current balance in your credit card statement.
Step 2: Divide your APR rate by 365 (for the 365 days in the year) to find your daily periodic rate.
Step 3: Multiply your current balance by your daily periodic rate.
Here is an example:
If your current balance is $500 for the entire month and your APR rate is 17.99%, you can find your daily periodic rate by dividing your current APR by 365. In this case, your daily APR would be approximately 0.0492%. By multiplying $500 by 0.00049, you'll find your daily periodic rate is $0.25. In order to calculate the monthly interest charges to your balance you simply need to multiply this daily periodic rate by the number of days in your billing cycle.
For most credit cards the average billing cycle is about 30 days. With this in mind, it is prudent to keep on top of payments each month in order to minimize this effect of daily compounding interest.
The steps above will put you on the right path to not only learning how to calculate APR on a credit card, it will also assist you in learning how to use your credit card efficiently.
Why is APR important?
By calculating your daily and monthly APR, you can better understand how much of your money is going to interest. This may motivate you to pay off your debt or help you decide what purchases are worth putting on the credit card. By breaking down your interest rates on a daily and monthly basis, you can learn more about the interest you are accruing over time and use this information to make some of your financial decisions.
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