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How is credit card interest calculated?

by Peter

Credit card interest is usually calculated daily, but it is not applied to your account until the very last day of your statement period.

Banks can use many complex systems to calculate the interest payable on your account, but the most common process is to charge compound interest on a daily basis. The best way to fully understand how credit card interest is calculated is by way of example.

Let’s assume your statement period is between the 11th to the 10th of every month. So, the first day of your statement period is March 11, and the last day is April 10.

You start the statement period with an outstanding balance from the previous month of 200, and you make acquisitions of 125 on March 15, 75 on March 19, 80 on March 25, and 190 on April 2.

Your final closing balance is 670, but your total balances throughout that period were:

Day 1 - 4 (March 11-14) = 200 per day, or 800

Day 5 - 9 (March 15-18) = 325 per day, or 1,300

Day 10-15 (March 19-25) = 400 per day, or 2,400

Day 16-23 (March 25-April 1) = 480 per day, or 3,840

Day 24-31 (April 2-10) = 670 per day, or 6,700

Total: 15,040

To work out your average daily balance, you divide this total by the number of days in the month (31), to get 485.16.

To then calculate the average daily interest rate, the banks divide your annual percentage rate (APR) by the number of days in the year. In a non-leap year of 365 days, and assuming a credit card interest rate of 12.99% per annum, the daily interest rate would be 0.0356%.

The daily interest rate of 0.0356% is applied to the average daily balance of 485.16, which equates to 17.27 pence per day. Once this figure is multiplied by the number of days during the statement period - in this example, 31 days - we get the final interest amount payable: 5.35.

When is interest charged?

Interest is charged on your credit card account will usually be debited on the last day of your statement period.

If you have a credit card with an interest free period - which is usually up to 25 days after the final day of your statement - interest will not be charged, as long as you pay the full closing balance by the date that it is due. If you fail to pay the full closing balance by the due date, interest will be charged daily from the purchase date.

About the Author:
Peter Carville is a freelance article writer who writes for Financial Facts about the current financial news and the credit crunch.
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June 11, 2009 | Filed Under Credit Cards

 

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