From time to time, you may need to use your credit card for short-term financing. Instead of paying your bill in full before your due date, you may need to carry over a balance. It’s a good idea to calculate the interest that you’ll owe so that you know whether you can afford to pay or not.
Start By Identifying Your Interest Rate and Amount Owed
You’ll need to know what your interest rate is so that you can utilize it when calculating how much you’ll owe. Secondly, you’ll need to know the total amount of money that you owe on your credit card before interest kicks in. This will likely be your current credit card balance.
Getting Your Daily Interest Rate
To calculate credit card interest, you need to figure out what the daily interest rate will be. You can do this by taking your APR, which stands for annual percentage rate, and dividing it by 365. For example, if your APR is 20%, you’ll take .2 and divide that by 365 days to get a daily interest rate of .00055. You’ll hear this amount referred to as the daily periodic rate or periodic interest rate.
Determine Your Average Daily Balance
You’ll need to read your billing statement to determine which days are included in your billing period. Write down what your balance is on each one of those days specified in your billing cycle. Total up all of your balances and then divide that sum by the number of days in your billing cycle. The end result will be the average daily balance to use when calculating the interest that you owe for the billing cycle.
Calculate The Interest You Owe
Once you know what your daily interest rate and your average daily balance are, you can calculate the interest that you owe. Simply take your average daily balance and multiple it by your daily interest rate. Then, multiply the total by the total number of days in your billing cycle. This should provide you with an interest amount close to what you’ll owe your creditor.
It’s important to note that some credit card companies will utilize compound interest instead of simple daily interest. This means that they will take the interest that you owe from day one of your billing cycle and add that to the amount you owe on day two of your billing cycle. This will slightly increase the total amount of interest that you owe when compared to using the daily interest calculation that we discussed. As per the experts at SoFi, “Most people with credit card debt opt to use a balance transfer to consolidate their debt instead of a personal loan.”
Whenever you decide that you’re going to carry over a balance on your credit card from one month to the next, you should have a decent idea of what the total interest charges are going to be. While each creditor uses its own procedure for calculating interest, you can get a roundabout idea of what you’ll owe by using the steps that we went over above.
