How to Figure Interest Rate on Credit Cards

Credit cards make shopping easier, but there’s a catch: The more you buy, the more you'll pay. If you can't pay in full, you'll be paying more for the items you buy in the form of interest. The interest payment accrued is a big burden to credit card holders, especially when it goes up due to delinquencies in payment.

Before you get into a financial hole, find out the interest rate on your credit card. Knowing the amount of interest you pay will help you budget wisely before your next purchase.

Examine your credit card statement. The credit card statement reflects the outstanding card balance due for payment, the applicable interest rate, the required minimum payment and the payment due date.

Determine how frequently your bank or credit card facility computes the interest of your credit card. Posting of interest rates, as well as finance charges, may vary based on how frequently your credit card computes your balances. For interests computed daily, creditors add the purchase entries daily, which accumulate until the billing period matures.

Most credit card companies use the average daily balance method, in which interest accrues daily. On the other hand, other credit card facilities record payments and credit balances by making adjusted entries at the end of the current billing period. This method allows a little leeway since purchases done within the current billing period won't appear until the next billing cycle.

Some credit cards, however, follow the two-cycle balance wherein statements reflect two billing cycles instead of one. The interest and finance charges for this method are higher.

Add up the daily balance for each day of the month to figure out your average daily balance. Find out the daily interest rate or periodic rate by taking the annual percentage rate of interest and dividing it by 365, the days in a year.

Look at your credit card statement instead of trying to determine the average daily balance yourself. Read the amount shown in "Balances subject to finance charge." This will give you the average daily balance in your calculation. Look for the "Periodic rate," which is also the daily interest rate; this will give you the periodic rate in the calculation.

Multiply the average daily balance by the daily interest rate. Then multiply the result by the number of days in a month to get the amount of your interest rate for the month. You can use a free online credit card calculator, such as the one on Bankrate.com, for a more simplified method. Simply plug in your values in the blank spaces provided.