How to Calculate Credit Card Interest
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Credit cards can make shopping easier in some ways, but they can also make it much more expensive. If you don’t pay off your balance every month – or fail to pay the bill at all – the interest charges quickly add up. If you’ll be making a major purchase that you won’t be able to pay off right away, then take a moment to calculate the potential interest that will come with it, to decide whether you can truly afford the purchase in the long run.
The exercise isn’t nearly as difficult as you may expect!
Here is a breakdown of how you can calculate your estimated credit card interest:
If you prefer to do the calculations by hand…
For the old-fashioned way, follow this method:
Here is an example of the calculations for a credit card with a 17.99% APR with an average daily balance of $2,500 and a 30 day billing cycle:
Avoid the Interest Charge
If the results of your calculations give you a mild heart attack, don’t fret. You can usually avoid credit card interest charges on purchases altogether by paying your balance in full during the billing grace period. Most major credit cards offer cardholders at least a 21 day-day period to pay their balance in full to avoid the charges.
Keep in mind, promotional interest rate offers may cause you to lose the grace period on purchases if you do not pay the entire statement balance (including the amount subject to the introductory APR) by the payment due date. If you plan to carry a balance, check with the credit card issuer to find out about the effects of the promotional APR offers on the grace period for new purchases.
Another good tip: If you want to make a large purchase that you won’t be able to pay off in one month, you may also want to consider opening a new credit card. Many credit cards feature a special rate for the first several months. Sometimes these rates are as low as 0%, providing you several months to pay off the balance before any interest charges occur, as long as you pay the minimum due each month.
Editor's Note: Calculations are an estimate based on assumptions. The actual time and cost to pay off your balance depends on the terms of your account and account activity. Your credit card issuer may calculate differently.
Follow @CreditDonkey or write to Meghan C at email@example.com
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