Credit card interest calculator

How is credit card interest calculated?

Your card does not charge you once a month at the annual rate. It charges you every day at a tiny slice of it, and then adds the total to your statement at the end of the cycle. That slice is the daily periodic rate, and it is simply your APR divided by 365.

The Consumer Financial Protection Bureau describes it plainly: many credit card companies calculate the interest you owe daily, based on your average daily account balance. Because interest accrues every day, paying down your balance sooner reduces what you owe, if your card has no grace period running.

The “average daily balance” part matters if your balance moves during the cycle. The issuer adds up what you owed at the end of each day, divides by the number of days, and applies the daily rate to that average. This is why paying on the 3rd rather than the 25th genuinely costs you less, even though both are “on time”. You lowered the average.

How does credit card interest work when you only pay part of it?

Here is the part that catches people. A payment settles the interest first. Only what is left over touches the balance.

On that $5,000 card, a minimum payment of around $154 breaks down as $104 of interest and $50 off the debt. You handed over $154 and the number on your statement dropped by fifty dollars. Keep that up for a year and you will have paid $1,751 to bring a $5,000 debt down to $4,432. Twelve months of paying, and the balance has moved by $568.

That is not a trick, and the card has not done anything improper. It is just what a high rate does to a small payment. But it explains a common experience: paying every month for years and feeling like the balance is nailed to the floor.

Credit card APR calculator: APR, daily rate and what they mean

APR stands for annual percentage rate. On a credit card it is the yearly cost of carrying a balance, quoted before any compounding.

One thing worth knowing: your card almost certainly has more than one APR. Purchases, cash advances and balance transfers are usually charged at different rates, and a cash advance typically carries both a higher rate and no grace period, so it starts costing you the moment you take it. Your statement must show each balance category and the rate applied to it.

How to calculate APR on a credit card by hand

If you want to check your statement rather than trust it, work backwards from the interest charge.

1. Find the interest charged for the cycle and the average daily balance. Both are printed on the statement.
2. Divide the interest by the average daily balance. That gives you the rate for that cycle.
3. Multiply by 12 for the APR. To get the daily rate instead, divide by the number of days in the cycle, then multiply by 365.

Worked through: $104.12 of interest on a $5,000 average daily balance is 0.020825 for the cycle. Multiply by 12 and you get 0.2499, or 24.99%, exactly the rate printed on the card.

The daily route gets you to the same place. A 30-day cycle charging $102.70 is 0.020540 for the cycle, which is 0.000685 a day, and 0.000685 × 365 is 0.25, or 25%.

If your own numbers come out materially different, the usual explanations are that the cycle was not 30 days, that a cash advance was charged at its own higher rate, or that a fee was included in the figure you started from.

The minimum payment trap, in numbers

Minimum payments are not designed to get you out of debt. They are designed to be affordable, which is a different goal, and the gap between those two things is where a great deal of money quietly goes.

Most issuers set the minimum as about 1% of the balance plus that cycle’s interest, with a floor of around $35. Because the payment is a percentage of a shrinking balance, it shrinks too, and the finish line keeps moving away from you.

That first comparison is the one to look at first. The difference between $5,400 saved and $5,400 lost is not discipline, not extra money, not a balance transfer. It is just refusing to let the payment shrink.

There is a worse version. If your card sets the minimum at a flat percentage of the balance and that percentage is lower than the monthly interest rate, the balance grows no matter how faithfully you pay. Set the formula above to a flat 2% on a 24.99% card and the calculator will tell you it never clears, because 2% a month does not cover 2.08% a month of interest. Switch the formula in the box and watch it happen; it is a useful thing to have seen once.

Grace periods, and the one month that changes everything

If you pay your statement balance in full every month, you normally pay no interest at all on purchases. That is the grace period, and it is why people who clear their card in full can treat a credit card as free money with a points scheme attached.

The catch is in how you lose it. A grace period usually applies only to new purchases, and only if you were not already carrying a balance. Once you carry a balance from one month to the next, new purchases can start accruing interest from the day you make them, with no grace period at all, until you clear the whole thing and serve out a full cycle.

So the month you first fail to pay in full is more expensive than it looks. You are not just paying interest on the amount you carried; you may be paying it on everything you buy afterwards too. If you are close to clearing a card, clearing it completely is worth noticeably more than clearing most of it.

One more rule in your favour, which few people know. When you pay more than the minimum, the issuer generally has to apply the amount above the minimum to your highest-APR balance first, then to the rest in descending order of rate. So overpaying attacks your most expensive debt automatically, the cash advance before the purchases. The issuer still decides where the minimum portion goes.

What actually gets a card cleared

Three things, in order of how much they matter.

1. Fix the payment and never let it fall. Decide on an amount, set it as a standing payment, and leave it alone as the balance drops. This single habit is worth thousands on a high-rate card, as the figures above show, and it costs you nothing you were not already paying.
2. Stop adding to it. The calculator assumes no new spending, which is the one assumption most likely to be wrong. A card you are both paying down and spending on will behave far worse than any projection here.
3. Deal with the rate, if you can. A 0% balance transfer can genuinely help, but check the transfer fee, which is typically 3% to 5% of the balance, and be certain what the rate becomes when the promotional window ends. A transfer that you do not clear within the window often leaves you no better off. Asking your existing issuer for a lower rate costs nothing and works more often than people expect, particularly if you have paid on time for years.

And if the numbers on this page have come out somewhere between alarming and impossible, that is worth taking seriously rather than filing away. A non-profit credit counsellor can look at the whole picture in a way a calculator cannot. The arithmetic here is honest, but it is only arithmetic.