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How to calculate credit card APR charges

Credit Cards

How to calculate credit card APR charges

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. Your credit card's Annual Percentage Rate is the interest rate you are charged on any unpaid credit card balances you have every month. By figuring out the daily periodic rate on your credit cards, you can have a better understanding of how compound interest is affecting how much you're paying back in interest. Your monthly statement may break down your APR yearly or monthly on your monthly statement, 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 a balance each month that you are not paying down the entire balance.

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.

Will I have to pay Annual Percentage Rate charges?

If you are carrying a credit card balance, you will be charged APR 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, and promotional rate. With fixed rates, your APR is likely to stay the same throughout the time you carry 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 to calculate your monthly APR

Calculating your monthly APR rate can be done in three easy steps:

  • Step 1: Find your current APR and current 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 to calculate your daily APR on a credit card

Your credit card company may calculate your interest with a daily periodic rate.

Calculate your daily APR in three easy 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.

If the steps above seem confusing, here's an example of how to calculate APR charge on a credit card:

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 should I know my daily and monthly APR?

Your credit card balance can fluctuate on a daily, weekly and monthly basis. By calculating your daily and monthly APR, you can better understand how much of your money is going to interest. Understanding how much of your money is going to interest rather than your balance may also 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.