How to Compute Credit Card Balances & Interest

If you want to get serious about paying off your credit card debts, it's important to learn about the balance and interest associated with your account. When you understand computations involved with determining your new balance as well as interest expense you pay each month, you can make better decisions about how to pay off the account more quickly. Gather basic information about your credit card account, including your current open balance and the annual interest rate, referred to as APR, to get started.

Instructions

Computing Interest Charge

1

Divide your annual APR by 365, which is the number of days in the year, to get the daily interest rate. For instance, if your annual APR is 12 percent, the daily interest rate is .0329 percent. Convert the percentage rate to a decimal point number, which is .000329 in this case.

2

Multiply the daily interest rate by the average daily balance listed on your credit card account. This is the balance on each day of the month added up and then divided by the number of days in the billing period. If the average daily balance is $5,000 and you multiply it by the daily interest rate of .0329, you're paying about $1.65 per day, which is .000329 times 5,000.

3

Multiply the daily interest expense by the number of days in the billing period to estimate the monthly interest charge. For a 30-day billing period, the interest cost is $49.35 in this example.

Computing New Balance

4

Start with your opening (previous month's) credit card account balance. Assume a balance of $5,000 for this example.

5

Calculate your interest expense as described in the first section and add it to the balance. Use the example of $49.35.

6

Add any new charges added to your account--skip this step if you did not add new charges to the card. Assume new charges of $100.

7

Subtract any payment amount you've made for the month in question. Assume a payment of $200. The result is your new balance, which is $4,949.35 in this case.