How to Calculate APR on a Credit Card
Understanding how to calculate the APR on your credit card is important for managing your money and reducing debt
Broadly speaking, your annual percentage rate (APR) is the price you pay to borrow money. And when it comes to credit cards, the APR and interest rate may be the same.
Things can still get slightly confusing though. Because even though APR is expressed in terms of years, credit card issuers often charge interest on a monthly basis. And the Consumer Financial Protection Bureau (CFPB) says the calculations themselves are often done daily. This article will give you an overview on how to calculate APR on a credit card each month.
What Does Credit Card APR Mean?
Before delving into a question like “How do you calculate the APR on a credit card?” you may want to familiarize yourself with more about how credit card interest works, and how it differs from something like annual percentage yield (APY).
Here are a few basics:
Variable APR vs. Non-Variable APR
APRs for credit cards can be either variable or non-variable. Variable APRs are often based on an index interest rate, such as the prime rate. When that index rate changes, so does the variable APR—and the amount you might owe in interest.
Non-variable APRs aren’t tied to an index rate, meaning they won’t change the same way. They’re sometimes referred to as fixed APRs. But that doesn’t mean fixed APRs never change. Depending on the terms of a card or an issuer’s policies, things like missed payments could cause a fixed APR to change. But the CFPB says issuers must let you know beforehand.
Different APRs for Different Transactions
The way a card is used can also affect the APR. There could be different APRs for regular purchases, balance transfers and cash advances. Things like promotional or introductory APRs might not be permanent.
There could also be penalty APRs for things like late or missed payments. And fees or charges beyond interest could also affect how much a person owes.
As you can see, there’s a lot that can affect credit cards’ APRs. But it’s not a secret or anything. According to the CFPB, your monthly credit card statement is required to break down the different types of transactions and accompanying APRs—and tell you the amount that contributes to what you owe.
For most credit cards, interest doesn’t come into play if you pay your balance in full every month by the due date. If you’re carrying a balance from month to month, however, the CFPB says interest could become a factor.
How Is Credit Card APR Calculated?
First, it’s important to know that APR calculations can vary depending on the issuer.
When it comes to calculating your monthly payments, you’ll actually have to do multiple calculations. But breaking it into individual steps can help simplify it all.
Step 1: Find Out How Frequently Interest Is Compounded
Before you jump into actual calculations, figure out how interest is compounded on your balance. In other words, figure out when interest is calculated based on how you’ve used the card. Your account terms, customer agreement or both should provide this information.
Issuers can calculate interest in multiple ways. One example is the previous balance method, which bases interest charges on what’s owed at the start of each billing cycle. But the CFPB says many credit card companies use a method that’s based on the average daily balance.
That’s the method Capital One generally uses—and what Step 2 below is based on. But check with your issuer to see how it handles things.
Step 2: Calculate Your Average Daily Balance
If your issuer uses the average daily balance method, you’ll need to know the balance you owe for every day of the billing cycle and the number of days in your billing cycle. From there you find the average by adding up the balance from each day and dividing it by the days in the billing cycle.
If you’re using your card daily and making payments throughout the month, it might be time-consuming trying to track the balance at the end of each day. But here’s a simplified example to help explain:
Let’s say there are 30 days in your billing cycle. And you start with a balance of $0, because you paid off your balance in full the previous month. Now let’s say you use your card in the following ways during the rest of the billing cycle:
- On Day 1, you buy some items totaling $500.
- On Days 2 through 20, you don’t use the card.
- On Day 21, you buy $50 in groceries, raising your balance to $550.
- On Days 22 through 25, you don’t use the card.
- On Day 26, you buy $50 in gas, raising your balance to $600.
- On Days 27 through 30, you don’t use the card.
That means there were 20 days when the balance was $500, five days when the balance was $550, and five days when the balance was $600. When you add those all up you get $15,750. Remember, you’re finding the average—that’s not what you owe. If any payments were made during the billing cycle, those would also be factored into the total.
When you divide $15,750 by 30, the number of days in the billing cycle, you get $525. That’s your daily average balance. Keep it in mind for later.
Step 3: Calculate Your Daily Periodic Rate
Remember, your credit card interest is expressed as an annual percentage. But to calculate how much interest you owe for each billing cycle, you’ll need to determine the rate for each day. That’s known as the daily periodic rate.
Thankfully, there are fewer numbers to sort out than in Step 2. The CFPB says you just need to divide your APR by 365—for each day of the year. The bureau adds that sometimes issuers calculate the daily periodic rate by dividing by 360. Capital One generally uses 365, so here’s an example equation that uses that:
If your APR is 19.99% and you divide it by 365, your daily periodic rate would be 0.0548%. Expressed as a decimal that’s 0.000548.
Step 4: Calculate Your Interest Charges for the Month
It’s time to calculate your interest charges for the monthly billing period.
For this step, you’ll need to multiply your average daily balance by your daily periodic rate to determine how much interest is compounding per day. You’ll then multiply that figure by the number of days in the billing period to determine your monthly interest charges. Here’s the example:
Using the examples from Steps 2 and 3, let’s say your average daily balance is $525 and your daily periodic rate is 0.0548%. By multiplying the two numbers together, you’ll find your daily interest charge: $0.2877.
You would then multiply that number by the number of days in the billing cycle—30 in these examples—to get your monthly interest charge of $8.63. Keep in mind, however, that if you pay your balance in its entirety on time, you won’t incur interest charges.
Payoff Calculator With APR
Had enough arithmetic? Put away your calculator and let Capital One do the math for you. With the tool at the bottom of this page, you can input your credit card’s APR—and a few other bits of information—to explore options as you pay off your credit card. Based on what you enter, the tool will give you estimates about monthly payments, interest payments and beyond.