How is interest calculated on credit cards?

Credit cards charge you a bit of interest every day, not monthly. So, how much you owe can grow day by day, not just when your monthly statement comes. This method is called daily compounding.

Imagine you have a credit card, and the bank says the interest rate is 20%. That’s typically what you’ll owe over a year, not each month.

Here’s how they figure out how much you owe if you don’t pay off your card each month:

Know your APR: Your APR is the yearly interest rate on your credit card. Let’s say your APR is 20%.

Find the daily rate: Divide your APR by 365 to get your daily interest rate. With a 20% APR, your daily rate would be about 0.055% (20% divided by 365).

Check your daily balance: Every day, your credit card company notes how much you owe. Imagine you owe $1,000 every day for a whole month.

Daily interest: Multiply your daily balance by the daily rate to see how much interest adds up each day. For a $1,000 balance at a 0.055% daily rate, you’d accumulate about 55 cents in interest daily.

Monthly interest: Add up all the daily interest for the month. If every day you accumulated 55 cents, over 30 days, you’d owe about $16.50 in interest for that month.

Carrying a balance on your credit card can lead to interest charges. But,  if you pay your balance in full every month, you won’t be charged any interest at all.