How To Calculate Your Interest Payment on a Credit Card

Calculating how much interest you are paying on a credit card can be a daunting and confusing experience. While different credit card companies calculate interest in different ways, the most common method of figuring your interest is below.

Some companies calculate interest with a fixed rate and others calculate interest using a variable rate which is usually equal to the prime rate (the going rate banks are charging for credit-worthy customers), plus a percentage that normally ranges from 2 to 7 percent, depending on the particular policy of the credit card company. Here's how to calculate your interest payment.

1. Check your current statement and see if you carried a balance for previous month(s). If you had a zero previous balance, there will be no interest accrued on the current month's purchases.
2. Determine your interest rate. Your rate should be listed on your statement as annual interest.
3. Determine the method used by your credit card company to accrue interest. The most common method used by credit card companies to accumulate interest is the average daily balance method. This means that interest will accrue on a daily basis.
4. Take any balances you have for the current month and add them together. Take the sum and divide it by the current month's total days. This will be your average daily balance.
5. Take your annual percentage rate and divide it by 365. This is your daily interest rate or what is referred to as periodic rate.
6. Now take your average daily balance (see step 4) and multiply it by your periodic rate (see step 5). This is the amount of interest your will be charged for the current month.

Note that most credit card companies will list all the information you need to figure your interest payment on the statement. On your statement there should be a place that lists "balance subject to finance charge." This amount will be the amount you use in your daily balance calculation.

To determine your finance charge using your statement, simply find the figure listed under "periodic rate," then find the amount listed in the spot labeled, "balance subject to finance charge," and multiply them together. Now multiply this number by however many days are in the current month. This will give you your monthly finance charge.

** Most credit card companies will allow a "grace period" on new charges which usually ranges from 20 to 25 days (please note that a grace period may only be allowed if your balance is paid in full). During a grace period, if the balance is paid, you will not be charged interest. Check with your card company to find details about your grace period.