How to calculate credit card interest
Editor's Note
Here at TPG, we always recommend paying off your credit card balances in full every month. Even the best rewards credit cards don't earn valuable enough rewards to offset the interest you'll be charged if you carry a balance.
But if you have a balance, it can be helpful to know how your interest is calculated to figure out how much you pay each month. The numbers on your statement can be confusing, though, and you may wonder, "How is credit card interest calculated?"
If that's the case, we have you covered. Here's what you need to know in order to figure out how much interest you will pay on a credit card.
Related: How to avoid and reduce credit card interest
How is credit card interest calculated?
Credit card interest is what the credit card company charges you to borrow money from them, which is what happens when you carry a balance. This interest is typically referred to as APR, which stands for "annual percentage rate." In other words, the APR is the amount of interest you'll accrue each year on your balance, plus any additional fees.
For example, if you have a credit card balance of $1,000 and your APR is 21%, you'll accrue $210 in interest over a year.
Related: What is a good APR for a credit card?
How to calculate credit card interest
Credit card interest typically accrues daily, so it's helpful to know how to calculate it based on whether you're charged daily or monthly; you aren't just charged one lump interest sum at the end of the year.
To break your APR down into monthly interest, divide the APR of 21% by 12. In this example of a $1,000 balance, your monthly interest rate is 1.75% or a monthly cost of $17.50.
To break it down into daily interest, divide the APR by 365, giving you an interest rate in this example of approximately 0.06% or a daily cost of around 58 cents per day.
Of course, these numbers assume that you keep your balance at $1,000. If you pay down your balance each month, you'll accrue less interest. And if you charge more to your card or don't pay the interest as it accrues, your balance will increase, meaning the amount of interest you're charged will also increase.
Related: Are you paying enough attention to your credit card's APR?
Types of credit card interest
To make matters slightly more confusing, the credit card company might charge you different types of interest.
In the above example of calculating credit card interest, we assumed a "fixed rate" APR, which, as the term implies, is an interest rate that doesn't change.
However, many cards have a "variable rate" APR, meaning that your interest rate is subject to change monthly based on federal rates. If you have a variable rate APR, you'll want to look at your APR on your statement every month and recalculate your monthly interest when it changes.
Some cards also have a lower "promotional APR" for some time. If you have one of these, pay careful attention to the promotional period end date and calculate your monthly interest based on your new APR when it ends. Of course, if you can, the best strategy is to pay off your full balance during the promotional period and avoid paying any interest moving forward.
Bottom line
If you never look closely at your credit card bill, it's easy to assume that credit card interest is impossible to understand. However, now that you know how credit card interest is calculated, you can use this information to understand exactly how your annual, monthly and daily credit card interest amounts are calculated.
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Why We Chose It
There’s a lot to love about the Amex Gold. It’s a fan favorite thanks to its fantastic bonus-earning rates at restaurants worldwide and at U.S. supermarkets. If you’re hitting the skies soon, you’ll also earn bonus Membership Rewards points on travel. Paired with up to $120 in Uber Cash annually (for U.S. Uber rides or Uber Eats orders, card must be added to Uber app and you can redeem with any Amex card), up to $120 in annual dining statement credits to be used with eligible partners, an up to $84 Dunkin’ credit each year at U.S. Dunkin Donuts and an up to $100 Resy credit annually, there’s no reason that foodies shouldn’t add the Amex Gold to their wallet. These benefits alone are worth more than $400, which offsets the $325 annual fee on the Amex Gold card. Enrollment is required for select benefits. (Partner offer)Pros
- 4 points per dollar spent on dining at restaurants worldwide and U.S. supermarkets (on the first $50,000 in purchases per calendar year; then 1 point per dollar spent thereafter and $25,000 in purchases per calendar year; then 1 point per dollar spent thereafter, respectively)
- 3 points per dollar spent on flights booked directly with the airline or with amextravel.com
- Packed with credits foodies will enjoy
- Solid welcome bonus
Cons
- Not as useful for those living outside the U.S.
- Some may have trouble using Uber and other dining credits
- You may be eligible for as high as 100,000 Membership Rewards® Points after you spend $6,000 in eligible purchases on your new Card in your first 6 months of Card Membership. Welcome offers vary and you may not be eligible for an offer. Apply to know if you’re approved and find out your exact welcome offer amount – all with no credit score impact. If you’re approved and choose to accept the Card, your score may be impacted.
- Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
- Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com.
- Earn 1X Membership Rewards® point per dollar spent on all other eligible purchases.
- $120 Uber Cash on Gold: Add your Gold Card to your Uber account and get $10 in Uber Cash each month to use on orders and rides in the U.S. when you select an American Express Card for your transaction. That’s up to $120 Uber Cash annually. Plus, after using your Uber Cash, use your Card to earn 4X Membership Rewards® points for Uber Eats purchases made with restaurants or U.S. supermarkets. Point caps and terms apply.
- $84 Dunkin' Credit: With the $84 Dunkin' Credit, you can earn up to $7 in monthly statement credits after you enroll and pay with the American Express® Gold Card at U.S. Dunkin' locations. Enrollment is required to receive this benefit.
- $100 Resy Credit: Get up to $100 in statement credits each calendar year after you pay with the American Express® Gold Card to dine at U.S. Resy restaurants or make other eligible Resy purchases. That's up to $50 in statement credits semi-annually. Enrollment required.
- $120 Dining Credit: Satisfy your cravings, sweet or savory, with the $120 Dining Credit. Earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, and Five Guys. Enrollment required.
- Explore over 1,000 upscale hotels worldwide with The Hotel Collection and receive a $100 credit towards eligible charges* with every booking of two nights or more through AmexTravel.com. *Eligible charges vary by property.
- No Foreign Transaction Fees.
- Annual Fee is $325.
- Terms Apply.