How to Calculate Credit Card Interest

For calculating  the interest credit card interest, you should learn simple and compound interest calculation. If you buy anything with credit card, it means you are buying with your accepted loan money. This loan is accepted by the bank who gave this credit card facility. So, credit card interest is the interest on your taken loan. You have to pay compound interest. It means, you have to pay interested on your payable interest also.

It is on your agreement, how will interest be compounded. Interest may be compounded every day, monthly, quarterly. For example, you have to buy something online through using your credit card. You have paid to the vendor $ 1000. It is the $ 1000 loan to you. If next day you have bought $ 2000 goods through credit card, it means first day's buying (loan + interest) value. If you will pay end of the money. Interest will charge every day on buying value plus interest which is pay at the end of the day. Computer software can calculate this interest so easily and fastly. If you want to calculate it manually, following are its steps:

1. Find the Annual Interest Rate 

Whether interest is compounded daily basis or monthly basis, you  have to find the annual interest rate from your original credit card agreement document. On this rate, you can calculate the amount of credit card interest which you have to pay every day or every month up-to the billing cycle. In technically, we say it APR (Annual percentage Rate).

2. Calculate Average Daily Balance 

Example : a) 

Day 1: You begin the cycle with a $1,000 balance on your credit card
Day 5: You make a new purchase of $300
Day 10: You make a payment of $50

This would mean that for days 1 thru 4, your daily balance was $1,000. So we would add those up ($1,000 + $1,000 + $1,000 + $1,000 = $4,000).

Then on day 5 you made a purchase of $300 and that means your new balance is $1,300. So for days 5 through 9 your balance would be $1,300 ($1,300 + $1,300 + $1,300 + $1,300 + $1,300 = $6,500).

Now we’re on day 10 when you made a $50 payment. Your new daily balance is $1,250 ($1,300 – $50). Since you have no other activity for the rest of the cycle, that amount would be your daily balance for days 10 through 30 (remember that’s including day 10, so it’s 21 total. $1,250 x 21 = $26,250).

The final calculation – We add up those three totals: $4,000 + $6,500 + $26,250 = $36,750. Now divide that amount by 30 and we get $1,225 as your average daily balance.

(Reference of example is from Credit Card Forum)

Example : b) 

You started the billing cycle with a balance of $100. On Day 4, you made a $100 purchase. On Day 20, a $25 payment was credited to your account. Your daily balance during the billing cycle was:

Day 1 – 3: $100
Day 4 – 20: $200 ($100 purchase)
Day 20 – 25: $175 ($25 credit)

To calculate your average daily balance you must total your balance from each day in the billing cycle and divide by the number of days in the cycle.

(Day 1 Balance + Day 2 Balance + Day 3 Balance…) / number of days in billing cycle

For example, if your total balance in billing cycle is $ 4575, then

$4575 / 25 = $183 

(Reference of example is from About.com's Debt Management Section)

3. Calculate the Credit Card Interest

ADB X APR/100 X number of days revolved/365

Let’s say your APR is 12% and your billing cycle is 25 days long.

$183 * .12 * 25 / 365 = $1.50