Use the credit card interest calculator to estimate how much interest you would need to pay if you happened to carry an unpaid balance on your credit card. This device's high specification allows you to examine and compare the interest payments in different repayment scenarios. While the line chart and pie graph help you to analyze the results visually, you can follow your credit card monthly interest from month to month in the payment schedule. In the following article, you can read how to use the credit card calculator, learn how to calculate credit card interest, and answer "How does credit card interest work?".
If you have a credit card debt, check our credit card minimum payment calculator to estimate how long it would take to pay off your balance with minimum payments.
How to calculate credit card interest?
If you have a credit card and happened to carry an unpaid balance through several months, you may experience a perplexing feeling when you see the considerable amount of charged interest.
To clear up the matter, we explain in the following point how to calculate credit card interest and what details you need to pay attention to.
- Get familiar with the relevant terms
- Interest rate or APR
Credit card issuers disclose the interest rate in the form of the Annual Percentage Rate (APR), which represents the credit's actual yearly cost. Still, in most cases, it is applied daily, meaning that they add (capitalize) the charged interest each day after the grace period.
Therefore, you can find the utilized interest rate on your credit card statement as the Annual Percentage Rate, or APR. Note, that the credit card issuer may apply variable or non-variable APRs, and also it may differ depending on the type of unpaid balance. For example, the APR for purchases might be 20 percent but for cash advances it could be 25 percent.
- Minimum payment
A credit card minimum payment is the lowest amount you need to pay by the due date to avoid any penalties or late fees and meet the terms of your card agreement. Therefore, it is crucial to transfer this amount monthly by keeping to the deadlines even when you are short of money. Of course, if possible, try to pay more than the minimum to reduce the finance charge on your remaining balance.
- Grace period
A grace period is a period between the end of a billing cycle and your payment due date. You may not be charged interest if you pay your balance in full during this time.
- Convert your APR to a daily periodic rate
Since interest is calculated daily, you need to convert the APR to a daily periodic rate. To do that, divide the APR by 365. Note, that some banks may use 360 for the computation, which will not result in a significant change.
Daily interest rate = APR / 365
How does credit card interest work?
Let's continue with the previous train of thought to find out how does credit card interest work:
- Determine the amount to which the interest rate is applied
Credit card issuers most commonly use the Average Daily Balance for interest computation, that is, the average of what you owed each day during the billing cycle.
The first thing is to find your unpaid balance — the amount carried over from the previous month. This balance changes everyday you make a financial transaction. For example, when you make a purchase, the balance goes up; when you make a payment, it goes down.
Once you have all the daily balances in a billing cycle, you need to sum up them and then divide by the number of days in the billing period to get the average daily balance.
Average daily balance = Balance #1 + Balance #2 + Balance #3 ... / Number of days in the billing cycle
As you can see, this procedure requires balances on each day during the billing cycle, which makes the computational process tedious. For ease of use, this credit card monthly interest calculator only asks you for the unpaid balance.
- Calculate the charged interest
At this point, you can determine the charged interest: multiply your average daily balance by the daily interest rate, and then multiply that result by the number of days in the billing period.
Credit card interest = Average daily balance * Daily interest rate * Number of days in the billing cycle
If interest is capitalized on your balance daily, which is the general practice of credit card issuers (and applied in the this credit card monthly interest calculator as well), the actual interest amount might be higher. The divergence between the different frequency of interest capitalization becomes more profound when you carry the unpaid balance for a longer period. To get familiar with this procedure, and see different compounding frequencies in different time horizons, check out our compound interest calculator.
How to use credit card interest calculator?
For the first step, you need to set the following parameters in the specification section:
- Current balance - your outstanding unpaid balance on your credit card.
- Due date - the closest date by which you need to make a monthly payment.
- APR - the Annual Percentage Rate.
- Repayment by - you can set here whether you would like to pay back your credit by fixed monthly or minimum required payments.
- Monthly fixed payment - the credit card payment you transfer monthly to reduce the unpaid balance.
- Additional monthly payment - the additional payment you may devote for repayment, which may result in a shorter repayment period with a lower interest charges.
After providing all of the above parameters, you will receive the following results:
You can learn here how long it takes to pay off your credit, what is the total payment amount and the charged interest with the fixed payment and the additional payment.
For the representation of results, schedules, and balances, you may choose from the following.
- Chart of balances
You can follow the unpaid principal balance with interest in both scenarios.
- Table of payment schedule
The payment schedule shows you the closing balances for each month, the monthly payments, and the principal and interest allocation.
- Pie chart of final balance breakdown
You can see the proportion of the charged interest as part of your total paid balance.
advanced mode you can set the parameters for the minimum monthly payment requirements and its calculation method applied by the credit card issuer.
The credit card interest calculator's results should be considered a model for financial approximation. All payment figures, balances, and interest figures are estimates based on the data you provided in the specifications that are, despite our best effort, not exhaustive.
Thus, and mostly because of the simplifications mentioned in the text, the calculator is created for instructional purposes only. Yet, if you experience a relevant drawback or encounter any inaccuracy, we are always pleased to receive useful feedback and advice.