If you aren’t paying your credit card balances in full each month, you probably see your interest charges on your credit card statement each month, but do you know how those are calculated? When you are building your credit score for a mortgage for your next home, this information is key. The Equifax Finance blog explains credit card interest calculations in the recent article, “How Is Credit Card Interest Calculated?”
There are three numbers you should pay attention to:
- The annual percentage rate (APR) – at the beginning of the year, the average for this rate was 13.02 for fixed-rate cards and 15.37 percent for variable-rate cards. You can find your card’s APR on your credit card statement. Rates on variable rate credit cards fluctuate throughout the year. Your rate may also rise if you make a late payment (as a penalty). Rates are different for different types of credit card uses – purchases, writing checks from your credit account, withdrawing cash, cash advances and balance transfers all may have different interest rates.
- The daily periodic interest rate (DPR) – this is how much you pay in interest each day, based on each day’s balance. This will be calculated for you on your credit card statement, but you can calculate it yourself. First, find out whether your credit card company calculates DPR using 360 or 365 days. Divide your APR by 360 or 365 (whichever it is for you) to find your DPR.
- The average daily balance (ADB) – On many credit cards, interest accrues daily, so creditors use the average daily balance (ADB) method to calculate interest. This is also already calculated for you and provided on your credit card statement, but you can calculate this number too, to ensure that you are being charged the right amount. Add the balances for each day of the month, then divide that number by the number of days in the billing period (usually 30 days).
Using your DPR and ADB, you can calculate how much you owe in interest by multiplying your ADB by your DPR, and then multiplying that number by the number of days in the month.
Since interest compounds, the key to getting out debt is to pay more than your minimum balance each month. You will not only pay off the balance quicker, you’ll save money in the long run by not having to pay so much interest. You can learn more about credit cards in general by visiting the USA.gov money and taxes discussion on them.
Get more information on credit, credit cards, debt and more at the Equifax Finance Blog, where you can also find helpful information on other personal finance topics like taxes, savings, retirement, insurance, identity theft protection and more.