The world is rapidly switching to credit cards for all big and small transactions. Hence, it is recommended that you know all about credit cards and their interest rates so that you can calculate interest on your credit card and plan your finances accordingly.

Once your billing cycle is over, you get 20 days to pay your credit card bills. After the due date, if you choose to not clear the outstanding amount and only pay the “minimum amount due” to continue your credit card services, then an interest is levied.

How to Calculate Credit Card Interest

Now the question arises: How is the interest calculated on a credit card?

The interest rate on credit cards is stated as the Annual Percentage Rate (APR). Annual Percentage Rate or APR is the interest rate that is levied yearly. But in reality, credit card interest rates are calculated monthly using the Daily Periodic Rate or DPR.

• DPR is calculated by simply dividing the APR by 365 (which is the number of days in a year).
• So, if your credit card has an APR of 10%, the DPR will be (10/365)%, which comes to be 0.0273%.
• When you multiply your DPR, the number of days in the billing cycle and the outstanding balance on your credit card, you get the monthly interest charges.

Monthly Interest Charges = Daily Percentage Rate (DPR) x Number of days in the billing cycle x Outstanding balance on credit card

Here is the credit card interest rate calculation explained with an example:

In Conclusion

Knowing how to calculate your credit card interest rate can come very handy. You can choose the credit card that offers the best interest rate so that you can afford to clear all your credit card dues efficiently. Furthermore, having a credit card with a low-interest rate also ensures that you never fall into debt while using your credit card.

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Frequently Asked Questions

1. What factors contribute to the amount of interest charged on a credit card?

The amount of interest charged on a credit card depends on the following factors:

• Annual Percentage Rate
• The daily average balance
• Grace period
• Credit history

2. What's the difference between APR and effective interest rate on a credit card?

APR is the annual rate of interest mentioned by credit card lenders. Effective interest rate depends on the Daily Periodic Rate (APR/365).

What happens when you carry a balance and accrue interest on a credit card?

You can carry a balance on your credit card, but you will have to pay interest charges on it and the interest charges build up over time to a huge amount.

4. How do credit card companies calculate interest? Daily or monthly?

Credit card companies calculate interest with the following formula:

Monthly Interest Charges = Daily Percentage Rate (DPR) * Number of days in the billing cycle * Outstanding balance on credit