Introduction to Credit Card Interest
Try our credit card interest calculator to calculate credit card interest and find out how long it will take you to pay off the debt. This tool can help you develop a plan to get your credit in order and avoid future interest payments.
How to Use the Credit Card Interest Calculator
Our credit card interest calculator can help you find out two important pieces of information:
- How much interest are you paying based on your current monthly payment?
- How many months will it take to pay off your credit card balance?
To use the calculator, first, enter your credit card balance and your card’s annual percentage rate (APR). If you don’t know this number, log into your credit card account and view your card’s terms and conditions. Next, decide whether you want to see how much total interest you will pay based on your current monthly payment or whether you want to specify your payoff target in months to see how total interest is calculated.
How to Calculate Credit Card Interest
Because interest is expressed as an APR, card issuers take several steps to determine how much to charge each month. Here’s how you can find out their method:
- Convert your APR into a daily rate. Most issuers charge interest daily. Therefore, divide the APR by 365 to find the daily periodic interest rate. Make sure you use the purchase interest rate (not the cash advance or balance transfer rate).
- Determine your average daily balance. Check your credit card statement to see how many days there are in the billing cycle. Then add up each day’s daily balance, including the balance carried over from the previous month. Once you have all the daily balances, divide the number by the number of days in the billing cycle to find your average daily balance.
- Multiply the balance by the daily rate and then multiply the result by the number of days in the cycle. Now that you have all the details you need, multiply the average daily balance by your daily periodic interest rate. Then multiply that number by the number of days in the billing cycle. Here you can see how much interest you pay per month.
A Quick Example
If you have a credit card with a $1,000 balance and an APR of 20%, your daily interest rate is 0.0548%. Assuming you don’t increase the debt, you’ll be charged about $0.55 in interest daily. If the billing cycle is 30 days, you’ll pay $16.50 in interest for the month.
How to Avoid Paying Credit Card Interest
When you receive a credit card statement each month, there will be a minimum payment amount listed. This is often a flat fee or a small percentage of your balance (usually 3%), whichever is greater. While it’s tempting to only pay the minimum amount required by your credit card issuer, doing so will guarantee that you won’t be charged interest because you’ll be carrying a balance the following month. Instead, make sure you pay off your balance in full each month. Not only will you avoid paying credit card interest, but your card issuer will also report these payments to credit monitoring bureaus, which can improve your credit score. Plus, the cashback or rewards you earn with the card are not offset by the interest charged, so you really get more out of using your card.
How to Reduce Credit Card Debt
If you already have a credit card balance, don’t despair. There are strategic things you can do to get out of credit card debt.
1. Negotiate with Your Credit Card Provider
The first step is to call your bank or credit card provider and request a lower interest rate. Your card issuer may be willing to work with you. So don’t hesitate to ask. They may agree to lower your rate, offer to switch you to a card with a lower interest rate, or create a repayment plan that’s right for your situation—but you’ll never know if you don’t ask.
2. Create a Budget and Pay Cash or Direct Debit
It’s essential to honestly track your income and expenses so you can reduce unnecessary costs. Stop charging your credit cards for purchases and switch to cash or debit instead. Although it may seem difficult, try contributing to an emergency savings fund. If you have an unexpected expense (such as an appliance repair or a vet bill), you can withdraw it from your balance instead of charging it to your credit card.
3. Open a Balance Transfer Credit Card
If you have a lot of debt, find a balance transfer credit card at a great promotional rate. Then transfer your existing balance to the card. You can pay off the balance quickly without being charged interest. The golden rule with balance transfer cards: Never charge the card for new purchases.
4. Try the Avalanche or Snowball Repayment Strategy
There are two main approaches to paying off debt:
- Avalanche method: Focus on paying off the debt with the highest interest rate first, while making only the minimum payments on your other accounts. Once the debt with the highest interest rate is paid off, move on to the debt with the next highest interest rate.
- Snowball method: Start by paying off the debts with the lowest remaining balance first, while continuing to make the minimum payments on your other debts. After you pay off a debt, move on to the next smallest balance. Although this method costs more in interest over time, it can provide strong motivation and impetus to stay on track with debt repayment.
5. Work with a Credit Counseling Agency
It’s completely understandable to feel overwhelmed with your credit card debt, which is why a credit counselor can be so helpful. Speak with representatives from your financial institution, credit counseling agency, or debt consolidation program to discuss your options. They can help you create a customized plan to resolve the situation.
6. Consider Debt Consolidation
If you’re juggling multiple loans and credit card balances and having trouble repaying them, it may make sense to consolidate your debts. This means combining two or more debts into one and only having to make a single payment per month. Another option is a debt consolidation loan from a bank or other financial institution. Or you could work with a credit counseling agency to negotiate a debt consolidation program (DCP) or consumer proposal (paying off only a portion of your debt) with your lenders.
Conclusion
Managing credit card debt can be challenging, but with the right strategies and tools, you can pay off your debt and avoid paying interest. By understanding how credit card interest works, using a credit card interest calculator, and following the steps outlined above, you can take control of your finances and achieve financial stability. Remember to always pay your balance in full each month, negotiate with your credit card provider, create a budget, and consider debt consolidation or credit counseling if needed. With time and effort, you can overcome credit card debt and build a stronger financial future.