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How Is Your Credit Card Interest Calculated?
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Credit card interest can be calculated using a formula that takes into account the outstanding balance, the annual percentage rate (APR), and the time period for which interest is being calculated. Here's a step-by-step breakdown of how to calculate credit card interest:
Determine the Daily Periodic Rate (DPR): Divide the APR by the number of days in a year (365 or 360, depending on the credit card issuer). This will give you the DPR, which represents the interest rate charged on a daily basis.
Calculate the Average Daily Balance (ADB): Add up the outstanding balances on your credit card for each day of the billing cycle, and then divide the total by the number of days in the cycle. This gives you the ADB.
Multiply the ADB by the DPR: Multiply the ADB by the DPR to calculate the daily interest charge.
Calculate the Total Interest Charge: Multiply the daily interest charge by the number of days in the billing cycle to get the total interest charge for that cycle.
What Is My Interest Rate?
Your interest rate, or APR, is the annual percentage rate charged by the credit card issuer. It represents the cost of borrowing money on the card and is expressed as a percentage. The APR can be either a fixed rate or a variable rate. Make sure to check your credit card agreement or contact your credit card issuer to determine your specific interest rate.
How Does Credit Card Interest Work?
Credit card interest is charged on any outstanding balances carried over from one billing cycle to the next. If you pay your credit card balance in full by the due date, you can avoid interest charges. However, if you carry a balance, interest will be applied to the unpaid portion, and the interest charges will be added to your balance, increasing the amount you owe.
When Is Credit Card Interest Charged?
Credit card interest is charged when you carry a balance from one billing cycle to the next. It is not charged on purchases if you pay the full statement balance by the due date during the grace period. However, if you only make a partial payment or carry a balance, interest will be charged on the unpaid amount.
How Does APR Work on a Credit Card?
The APR on a credit card represents the annualized interest rate charged for carrying a balance. It includes both the interest rate and any applicable fees or charges. The APR can be either a variable rate or a fixed-rate APR. A variable APR can change over time, while a fixed-rate APR remains constant.
What Determines a Credit Card’s Interest Rate?
Several factors determine the interest rate on a credit card. These include your creditworthiness, credit history, the type of card you have, prevailing market rates, and the credit card issuer's policies. Cardholders with better credit scores and credit histories generally qualify for lower interest rates.
Credit Card Interest in a Nutshell
Credit card interest is calculated based on your outstanding balance, APR, and the length of the billing cycle. To minimize credit card interest:
Pay your balance in full by the due date to avoid interest charges.
Consider using a credit card with a lower APR.
Avoid cash advances, which typically have higher interest rates and no grace period.
Make more than the minimum payment to reduce the outstanding balance and interest charges.
Pay off high-interest debt first or consider consolidating debt with a lower-interest option.
Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!