How to Calculate the Interest Expense of a Floating Credit Line

A floating credit line, also known as a variable interest rate line of credit, has interest expenses that change frequently. The floating interest rate is usually obtained by adding a margin, which is a certain number of percentage points to an index, such as the prime rate. The interest expense each month is based on both the current interest rate and the amount owed on the credit line. Floating credit lines are most commonly found on credit cards and home equity lines of credit.

Instructions

1

Look up how the floating interest rate is calculated by calling your lender or checking your line of credit origination documents. In particular, find out what index it is tied to and what your margin is. For example, your rate might be the six-month LIBOR rate plus 5 percent.

2

Look up the current index rate through a financial website, such as Bankrate. For example, at the time of publication, the six-month LIBOR rate was 0.40 percent.

3

Add your margin to the index to find your current interest rate. In this case, your current rate is 5 percent plus 0.4 percent, which makes 5.4 percent.

4

Divide the current annual interest rate by 1,200 percent to calculate your monthly interest multiplier. In this case, 5.4 percent divided by 1,200 percent gives a multiplier of 0.0045.

5

Look up your credit line balance on your most recent statement or the online account management page. For example, you might currently owe $9,241.

6

Multiply your current balance by the current monthly interest multiplier. For example, $9,241 times 0.0045 is $41.58, which is your interest expense for this month.

7

Repeat the calculations each month, taking into account the current interest rate and your revised account balance, including payments and charges from the previous month.