Credit card interest calculator
How does credit card interest work?
Not sure where to start with the calculator above? Let’s take a look at four terms you’ll find in the fine print of your credit card statement and cardholder’s agreement:
Annual Percentage Rate (APR)
Your APR is the yearly interest rate applied to unpaid balances on your credit card. Think of it as the price you pay for borrowing money.
For example, if your card has an APR of 19.99% and you carry a $1,000 balance for a full year without making any payments, you’d owe approximately $200 in interest. However, credit card interest typically compounds daily, meaning you’ll likely pay even more.
Daily Periodic Rate (DPR)
The DPR is simply your annual rate broken down to a daily charge:
- Calculate by dividing your APR by 365 (some card issuers use 360)
- Example: 19.99% ÷ 365 = 0.0548% DPR
Average Daily Balance (ADB)
This is the average amount you owe each day during your billing cycle:
- Add up your balance at the end of each day in the billing period
- Divide by the number of days in the cycle
How credit card companies calculate your interest
Credit card issuers use one of two methods to calculate interest, but both follow the same general approach:
- Convert your APR into a daily rate (DPR)
- Calculate your daily balance
- Apply the DPR to each day’s balance
- Compound the interest daily until the end of your billing cycle
Interest charges are then added to your balance, minus any payments you’ve made.
Step-by-step interest calculation example
Let’s walk through a real-world example:
- Find your DPR: With an APR of 18.25%, your DPR would be 0.05% (18.25% ÷ 365)
- Determine your Average Daily Balance: For simplicity, let’s say it’s $1,000
- Calculate first day’s interest: $1,000 × 0.05% = $0.50
- Calculate second day’s interest: New balance is $1,000.50 × 0.05% = $0.50 (plus a fraction of a cent)
- This daily compounding continues throughout your billing cycle
After a 30-day billing period, you’d owe approximately $15.11 in interest, assuming no new purchases or payments were made.
Effective strategies to minimize credit card interest
We recommend these proven approaches to reduce or eliminate interest charges:
1. Pay your balance in full each month
The most effective strategy is also the simplest: pay off your entire balance by the due date. This approach:
- Completely avoids interest charges
- Builds your credit score
- Qualifies you for better credit offers in the future
- Makes it easier to secure mortgages and other loans
Pro tip: Be extra cautious with charge cards (like some American Express cards). These typically require full payment when your statement posts and often charge higher-than-average interest rates.
2. Switch to a low-interest credit card
We all carry balances sometimes—whether for a major purchase, unexpected expense, or to prioritize other financial goals. If you anticipate carrying a balance, consider switching to a low-interest card.
While most Canadian credit cards charge around 20% interest, low-interest card options can cut that rate in half or better.
3. Take advantage of balance transfers
Balance transfer promotions let you move existing debt to a card with a lower interest rate—sometimes as low as 0% for a promotional period.
This balance transfer credit card strategy can significantly reduce or even eliminate interest charges temporarily, allowing more of your monthly payment to reduce the principal balance.
4. Consider debt consolidation
If you’re juggling multiple credit card balances with different interest rates, a debt consolidation loan might be your best option. This approach:
- Replaces multiple interest rates with a single, lower rate
- Simplifies your finances with one monthly payment
- Often reduces your total monthly payment amount
Remember: Interest charges might seem small on a day-to-day basis, but they can add up to thousands of dollars over time. Taking control of credit card interest is one of the most effective ways to improve your financial health.
Conclusion
Understanding how credit card interest works is your first line of defense against unnecessary charges. The math might seem complicated, but the strategy is simple: minimize the balance you carry from month to month. Even small steps like making an extra payment mid-cycle can significantly reduce your interest costs over time.
If you’re currently carrying credit card debt, don’t wait to take action. The sooner you implement one of the strategies we’ve outlined, the less money you’ll lose to interest payments. Whether you choose to aggressively pay down your balance, transfer it to a lower-rate card, or consolidate your debt, what matters most is taking that first step.
Remember, when it comes to credit card interest, knowledge isn’t just power—it’s money in your pocket.
