How to Calculate Interest on Credit Cards
Credit card interest calculations are among the most complicated—they involve everything discussed thus far. Let’s break them down step by step.
Step 1: Understand APR and DPR
The credit card APR (interest rate) is stated on an annual basis, but interest is calculated daily using either the exact DPR (365 days) or the ordinary DPR (360 days), depending on the card issuer. The issuer charges the interest to you on a monthly basis, taking into account the number of days in each month. The APR is usually a variable interest rate that fluctuates based on the prime rate as well as other factors, most notably your creditworthiness and your payment history.
Step 2: Understand ADB
Each time you make a purchase, return, or payment, your outstanding principal changes. This moving outstanding principal goes into the average daily balance (ADB) calculation.6 ADB is determined by adding up the daily balances for each day the DPR is in effect and then dividing by that number of days.
Step 3: Apply the Formula
The formula for calculating monthly credit card interest looks like this:
Interest charged = ADB x DPR x Days the DPR is in effect.
Many online calculators can help you estimate the interest charges for credit cards. Check your card agreement to find the variables you’ll need to input into those calculators.