{"id":9163,"date":"2022-03-01T09:00:00","date_gmt":"2022-03-01T15:00:00","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=9163"},"modified":"2025-05-14T15:29:58","modified_gmt":"2025-05-14T21:29:58","slug":"how-is-credit-card-interest-calculated","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/credit-cards\/how-is-credit-card-interest-calculated.html","title":{"rendered":"How is credit card interest calculated?"},"content":{"rendered":"\n
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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice.<\/em> See Lexington Law\u2019s editorial disclosure for more information.<\/em><\/a><\/p>\n\n\n\n

The goal for most cardholders is to pay their credit card balance in full every month so they won\u2019t be charged a penny of interest. Of course, there are many people who can\u2019t do this. According to one survey, approximately 45.4 percent of American families<\/a> have credit card debt. <\/p>\n\n\n\n

Whether you try to always pay off your credit card completely or you carry a balance from month to month, you should understand how your credit card interest is calculated and how it works. We\u2019re here to break it down for you so you know where you stand with your credit cards. <\/p>\n\n\n\n

What is credit card interest?<\/h2>\n\n\n\n

Credit card interest is the money you\u2019ll be charged if you don\u2019t pay your credit card balance in full by the monthly deadline. Essentially, credit card interest is the cost of borrowing money from the card lender. <\/p>\n\n\n\n

Your credit card interest rate is expressed through an annual percentage rate (APR)<\/a>, which is the yearly interest charged on a loan or credit card. You can find your credit card\u2019s APR within the terms and conditions of the credit card contract and on your monthly statement.<\/p>\n\n\n\n

You aren\u2019t charged interest from the moment you make a purchase on your credit card\u2014instead, you have a grace period<\/a>. You have from the end of your billing period to the payment due date to pay any charges on your statement without incurring interest. If you miss this deadline, interest will start to accumulate and will continue to do so until you pay off the amount in question entirely. <\/p>\n\n\n\n

Note that some cards have an introductory or promotional APR. In this case, you may get an offer, like 0 percent APR, for the first six months you have the card. After this, the card will begin having a standard rate. Again, you can find all these details in your credit card terms and conditions and also in your monthly statement. <\/p>\n\n\n\n

According to CreditCards.com data, Americans\u2019 average credit card interest rate was 16.13 in January 2022<\/a>. Of course, this was just an average. Your credit card APR can vary significantly depending on the type of card you have, your credit history and other factors. <\/p>\n\n\n\n

Variable rate vs. fixed rate<\/h3>\n\n\n\n

Most credit cards have a variable interest rate, but a few fixed options are also available. Variable rates change based on federal rate fluctuations. This means your rate won\u2019t necessarily stay at the rate you had when you initially signed up for the card. However, the good news is that you shouldn\u2019t be too surprised by rate changes. Thanks to the 2009 Credit CARD Act, lenders have to give borrowers advance notice before issuing a rate increase. <\/p>\n\n\n\n

The Credit CARD Act was passed by the U.S. Congress and signed into legislation by President Barack Obama. The intent of the act is to help \u201cestablish fair and transparent practices relating to the extension of credit.\u201d<\/a> One of the many changes made by the act was that lenders have to give written notice of an increase to an APR at least 45 days before the change comes into effect. <\/p>\n\n\n\n

A fixed rate is much less common for credit cards but does exist. A fixed rate (also known as a non-variable rate) will usually remain unchanged, which some people prefer because it offers consistency and is easier to plan around. However, there are some instances when even a fixed rate can change. For example, many credit cards stipulate that a missed payment results in an increase in the fixed rate. <\/p>\n\n\n\n

Penalty APRs<\/h3>\n\n\n\n

Penalty APRs are just what they sound like\u2014a higher APR that kicks in as a penalty, usually when you\u2019ve missed a payment by at least 60 days. Some penalty APRs can be as high as 22.99 percent, but the exact amount will depend on your card\u2019s contract. <\/p>\n\n\n\n

Once a penalty APR kicks in, it can apply to all current and future charges. In fact, a penalty APR can override an introductory offer, like the ones we covered earlier. <\/p>\n\n\n\n

After approximately six months of on-time payments, most cards will revert from the penalty APR to the original APR. <\/p>\n\n\n\n

How your credit card interest is calculated<\/h2>\n\n\n\n

Since your given interest rate is annual but you\u2019re billed monthly, card issuers use the APR to calculate how much you should be billed each month. And this amount doesn\u2019t have to remain a mystery to you. Just follow these simple steps to determine how your credit card interest is calculated: <\/p>\n\n\n\n

1. Determine your daily rate<\/h3>\n\n\n\n

Take your APR and divide it by 365 for each day of the year. So, if your credit card APR is 18.25 percent, your daily rate will be 0.05 percent, which in decimal form is 0.0005.<\/p>\n\n\n\n

2. Determine your average daily balance<\/h3>\n\n\n\n

Go through all the transactions in your billing period, day by day, and add up each day\u2019s balance. Don\u2019t forget to add the balance that carried over from your previous billing cycle and subtract any payments made during the current cycle as applicable. Then divide the total by the number of days in the billing period to get your average daily balance. <\/p>\n\n\n\n

For example, if you had a balance of $0.00 for 10 days, then $500.00 a day for 10 days, then $1,000.00 a day for the last 10 days of the month, you would add all of those numbers up to get $15,000. Divide that by 30 days, and your average daily balance would be $500.<\/p>\n\n\n\n

3. Multiply to determine your daily interest charge<\/h3>\n\n\n\n

The last step is to multiply your daily rate by the average daily balance. You then take that number and multiply it by the number of days in your billing cycle. <\/p>\n\n\n\n

So, in the above examples, you would take 0.0005 and multiply it by $500 to get $0.25. Next, you would multiple $0.25 by your billing cycle of 30 days. Your interest for the month would be $7.50. <\/p>\n\n\n\n

This number might sound small, but over time you will have to pay more and more in interest if you don\u2019t fully pay off your balances.<\/p>\n\n\n\n

How to pay less in credit card interest<\/h2>\n\n\n\n

Here are four ways to either reduce or avoid any interest charges on your credit cards:<\/p>\n\n\n\n

1. Pay your balance in full<\/h3>\n\n\n\n

The most obvious step is to always pay your balance in full.<\/a> However, if you can\u2019t do this, it\u2019s essential to at least make the minimum payment. Making the minimum payment will ensure you don\u2019t get a negative mark on your credit report for missed payments and help you prevent a penalty APR from kicking in. <\/p>\n\n\n\n

2. Make payments more often<\/h3>\n\n\n\n

You don\u2019t have to wait until the end of your billing cycle to make a credit card payment. Making payments more frequently will help you lower your average daily rate and subsequently lower your interest charges if you carry a balance. <\/p>\n\n\n\n

3. Use a balance transfer card<\/h3>\n\n\n\n

A balance transfer<\/a> card typically gives you an introductory APR that\u2019s low (often as low as 0 percent). The introductory APR will only last a few months, so you have to make sure you take advantage of it and pay off all your credit card debt, or as much of it as you can, to make it worth it. <\/p>\n\n\n\n

Additionally, be aware that balance transfer cards usually come with a one-time fee that\u2019s a percentage of your balance. You\u2019ll want to consider this cost when evaluating if the balance transfer is the best financial decision. <\/p>\n\n\n\n

4. Improve your credit<\/h3>\n\n\n\n

Typically, higher credit scores<\/a> are associated with more favorable credit card terms and offers. So if your credit score increases, you might be able to get a new card with a lower APR, or you could potentially even ask your card provider if they\u2019d be willing to decrease your current card\u2019s APR.<\/p>\n\n\n\n

Use credit wisely<\/h2>\n\n\n\n

If you use it responsibly, you can use a credit card for purchases, gain rewards or cash back and never pay any interest. However, poor credit card habits can cost you a lot in interest and even negatively impact your credit score. <\/p>\n\n\n\n

If you have a low credit score due to previous financial mistakes, you can rebuild your credit. The credit repair consultants at Lexington Law Firm have helped thousands of people review their credit, file disputes and see an improvement, so reach out to our team today<\/a> to see how we can help you.<\/p>\n\n\n\n

Note:<\/em><\/strong><\/a> Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

It\u2019s important to understand how credit card interest works because it can greatly impact your bill. Find out how credit card interest is calculated here.<\/p>\n","protected":false},"author":63,"featured_media":17255,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[516],"tags":[366,412,304,114,367],"yoast_head":"\nHow is credit card interest calculated?<\/title>\n<meta name=\"description\" content=\"It\u2019s important to understand how credit card interest works because it can greatly impact your bill. 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