Interest Rates

• When calculating interest on your credit card, you sometimes need to use multiple interest rates in the calculations. For example, most credit cards charge a higher interest rate for cash advances than for regular purchases. In addition, if you trigger the penalty interest rate, it is sometimes applied only to purchases after the rate increases. Therefore, if you have different types of balances, you have to calculate the interest on each type separately and add them together to determine the total interest.
  
  

Outstanding Balance

• The outstanding balance on your credit card is the amount of money on which you are charged interest. In general, credit card companies use the average daily balance method to calculate your outstanding balance. The credit card company obtains this by adding together the credit card balance on each day during the billing cycle and dividing this by the number of days in the cycle. Other potential methods for calculating the outstanding balance include using the previous month's balance or adjusting the previous month's balance by subtracting payments made during the month.
  
  

Monthly Interest Calculation

• You calculate how much interest you must pay for this month's billing period by multiplying the outstanding balance by the periodic interest rate. The periodic interest rate is the annual percentage rate (APR) divided by the number of billing periods in the year, which is 12 for monthly bills. For example, assume your outstanding balance on purchases is $4,295 and your APR is 18 percent. Convert 18 percent into the decimal version of 0.18 and divide by 12 to get a periodic rate of 0.015. Multiply this by your balance to determine that you owe $64.43 in interest for the month. Sometimes the credit card company has a minimum finance charge and will round small interest charges up to the minimum charge.
  
  

Long-Term Calculations

• You can use an online interest calculator to determine how much interest you will pay in the long run as you work on paying off your credit card. Your credit card statement shows the total interest if you make no new charges and either make only the minimum payment or make a specific fixed payment every month for three years. If you would like to make a fixed payment of a different amount, calculate the total interest by plugging in your balance, monthly payment and interest rate into an online calculator. For example, if you pay $200 per month on your balance of $4,295 at 18 percent interest, you will pay off your card in 27 months, and it will cost you a total of $927.83 in interest over that time.