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Credit Card Interest Formula:
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The credit card interest calculation determines how much interest you'll pay on your credit card balance using the average daily balance method. This is the most common method used by credit card issuers to calculate interest charges.
The calculator uses the following equation:
Where:
Explanation: The equation calculates interest by multiplying the average daily balance by the daily periodic rate (APR divided by 365) and then multiplying by the number of days in the billing cycle.
Details: Understanding how credit card interest is calculated helps consumers make informed decisions about payments and debt management. Even small changes in payment amounts can significantly affect total interest paid over time.
Tips: Enter your average daily balance in dollars, APR as a percentage (e.g., 18.99), and the number of days in your billing cycle (typically 28-31). All values must be positive numbers.
Q1: How is average daily balance calculated?
A: Add up each day's balance during the billing cycle, then divide by the number of days in the cycle.
Q2: Does this include compound interest?
A: This calculates simple interest for one billing cycle. Credit cards typically compound interest daily, but this shows the basic calculation.
Q3: What if I make payments during the cycle?
A: Payments will reduce your average daily balance, thus reducing interest. For precise calculations, you'd need to account for each day's specific balance.
Q4: Why divide APR by 365?
A: This converts the annual rate to a daily periodic rate since interest is calculated daily.
Q5: Are there other interest calculation methods?
A: Some cards may use adjusted balance or previous balance methods, but average daily balance is most common.