How is credit card interest calculated?

Last Updated: May 24, 2013 11:24PM UTC

Credit card interest is typically calculated based on the average daily balance during the billing cycle. It's typically not based on the statement balance.

Average daily balance is calculated by taking the outstanding balance on each day of the billing cycle, adding them together, and dividing my the total number of days. The annual percentage rate (APR) is then divided by 12 (for the number of months in the year). This result is multiplied by the average daily balance to determine interest charges for the billing cycle.

For example, if your average daily balance for the billing cycle is $1,500 and your card has an APR of 18%, interest charges would be: $1,500 x (0.18/12) = $22.50.

‚ÄčCredit cards issuers are required to provide a grace period where you won't be charged any interest as long as you pay the balance due in full by the due date. Once you start carrying a balance from month to month, this grace period is often lost.
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