For all you credit card holders and future credit card holders, you might be wondering if there is a cost to carrying a credit card balance. To figure out how much you’re going to pay in interest, you need to know how your card’s annual percentage rate (APR) works.

The APR is basically the yearly interest rate charged on a credit card. The higher the APR, the more interest you will have to pay whenever you carry a balance on your card. Below, we will go over in depth what that means and ways to calculate it.

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What Is APR?

Before trying to figure out how to calculate your credit card interest is, we’ll look into what APR is. Basically, the APR on your credit card is the annual rate that your card issuer will charge you whenever you carry a balance. The higher a credit card’s APR, the more interest you’ll pay. If you always pay your bill in full and you never carry a balance, then APR and interest charges won’t affect you.

There are two main types of APR that a credit card issuer might use. Some cards will have a variable APR and others will have a fixed-rate APR. Variable rate credit cards have an interest rate that follows another index, such as the U.S. prime rate. So when the U.S. prime rate changes, the interest rate on those credit cards will also change. Keep in mind thought that credit cards with a variable APR may change monthly, quarterly or yearly.

Calculate Your Daily Periodic Rate

Your credit card issuer will use your card’s APR to determine how much you pay in interest. First, it converts that annual rate into a daily rate. This is the daily periodic rate (DPR).

To calculate your credit card’s DPR, you need to divide your credit card’s APR by 365. Issuers use this number to represent the number of days in a year. There are a couple of things to note here. Some issuers will use 360 instead of 365. You will need to check with your individual card to make sure you’re using the correct number. Purchases, balance transfers and cash advances also have different APRs for cards. Make sure that you are using the correct APR when for your calculations.

Once you have divided the APR, you are left with the DPR. Using this number, multiply it by the amount that you owe and you will be left with amount of interest that you owe after each day. The daily amounts are added up into one lump sum at the end of your billing cycle (i.e. the end of the month). That sum is your interest charge for the month. However, there is one more number to consider: your average daily balance.

Calculate Your Average Daily Balance

One big challenge with calculating credit card interest is that your credit card balance can change over the course of a month. However, your balance does go down if you make a payment.

Interest on a credit card applies to your total balance but what happens when your balance changes? To handle that, your credit card issuer will use your average daily balance to calculate interest charges. This is the average of the daily balances that you owed over that month or billing cycle.

To calculate this average you need to write down the balance that you owed at the end of each day of the billing cycle and then average all those numbers. This is the number your card issuer will use to calculate interest.

Calculate Your Interest Charges

Now that you know your DPR and your average daily balance, you can use this information to calculate how much you should owe in interest at the end of the month.

Watch Out for Penalty APRs

If your payments are being made nearly 60 days late, then your credit card issuer may bump up your APR to a penalty APR. This could potentially be twice as high as your standard APR.

Also, you will need to keep that penalty APR for a certain amount of time before your credit card issuer will even consider lowering your APR back to normal. This could mean six months or more of on-time payments with the penalty rate.

That is why it is crucial that you are careful with your finances, including your credit card, to avoid triggering this higher interest rate. A good tip is to set up payment reminders so you don’t forget to make those minimum payments. If you need to, you could even change the due date of certain bills so that you’re sure you have time for your paycheck to hit to make those payments.

Bottom Line

Before signing up for any form of credit, such as credit cards, it is important to figure out how your issuer will calculate interest charges. Different credit card issuers will use a different formula, but you will always be able to calculate your interest charges as long as you know your credit card’s annual percentage rate (APR). For more posts like this, check out our list of bank guides!