How Is Credit Card Interest Calculated?

Images by Getty Images; Illustration by Austin Courregé/Bankrate

Responsibly using a credit card means understanding how interest works and what it means for how much you could owe. Ideally, you’ll be able to pay your balance in full every month, but if you find yourself needing to carry a balance at some point, interest charges can rack up quickly. Here’s the lowdown on how credit card interest is calculated.

How credit card interest works: Credit card interest is the price you pay to borrow money from a lender. In most cases, credit card interest is charged when you don’t pay your entire balance by the end of your grace period (if your card has one) and decide to carry a balance from month to month.

The difference between interest and APR: The terms “annual percentage rate (APR)” and “interest rate” are often used interchangeably when discussing credit cards. However, there are some differences.

Why it matters: Interest, or the rate banks charge to lend you money, is an important factor to consider when using credit cards. Forty-three percent of those carrying credit card debt didn’t know the interest rates attached to their cards, according to a December 2022 Bankrate survey. Understanding how interest is calculated, and how you can calculate it yourself, can help you plan for the times you might have to carry a balance — or even avoid carrying one altogether.

Calculate credit card interest on your own: When calculating credit card interest, it’s important to consider the different factors that go into it. It’s calculated based on your annual percentage rate (APR), which is the interest rate expressed on an annual basis, as well as your average daily balance. You can calculate your interest using the following steps:

• 1. Convert the annual rate to the daily rate
  

  Credit card interest is expressed as an APR, which is calculated by dividing the annual rate by 365 (the number of days in a year). It’s important to note, however, that some lenders may divide the APR by 360 instead. Check your cardholder agreement to see which option your card issuer applies.

  Let’s say you have an APR of 19 percent, which is relatively low compared to the current average of around 20 percent. Divide that by 365:

  19% / 365 = 0.052%

  This means your daily rate is 0.052 percent.

• 2. Calculate your average daily balance
  

  Your daily balance is the amount you owe on your card at the end of each day, and your average daily balance is the sum of all those daily balances divided by the number of days in your billing cycle.

  Your credit card balance fluctuates throughout a billing cycle based on:

  You can calculate your average daily balance by reviewing your credit card statement and adding or subtracting transactions from each day to find that day’s balance. Remember to include the daily interest you calculated in Step 1 if your bank uses a compounding interest method.

  Then, add all those daily balances together and divide that figure by the number of days in your billing cycle. The result will be your average daily balance.

  To simplify this, let’s say you owe $1,000 at the start of your billing cycle, don’t make any additional charges to the card and don’t pay anything off. This means that the daily balance for each day in your billing cycle — let’s say it’s 31 days — would be $1,000. To find the average daily balance, we’d add each daily balance to get the total. In this case, since the daily balance was $1,000 for each day, the total daily balance would simply be $31,000.

  Then, divide that total by the number of days in the billing cycle:

  $31,000 / 31 = $1,000

  $1,000 is your average daily balance, assuming you were in the midst of a grace period and compounding interest doesn’t need to figure in.

• 3. Determine your interest charges
  

  Once you have determined your daily rate and average daily balance, you can calculate your interest charges by multiplying these two numbers together and then multiplying that result by the number of days in the billing period. This equation will give you the total interest charges you will be charged for the given billing period.

  Let’s wrap up our example. Take your daily rate of 0.052 percent and your average daily balance of $1,000. Now, multiply them:

  0.052% x $1,000 = $0.52

  Next, multiply that amount by 31 since that’s the number of days in the billing cycle.

  $0.52 x 31 = $16.12

  So, you’ll pay $16.12 in interest charges that month.

What happens if you carry a balance: When this occurs, the credit card company will calculate how much you owe at the end of each billing cycle. Although your interest compounds daily, your issuer typically won’t add the interest to your balance until the first day of the next billing cycle. This process is repeated each month if you don’t pay off your balance in full.

FAQs

• How is your credit card APR determined?
  

  Credit card interest, shown as an APR (Annual Percentage Rate), is based on several factors including your credit score, credit history and payment behavior. Generally, higher credit scores (like a good credit score or excellent credit score) qualify for lower APRs, while lower scores may result in higher rates.

  The type of card also matters. Reward credit cards often have higher APRs due to the perks they offer. Some cards feature introductory 0 percent APRs on purchases or balance transfers for a set period (typically 12-21 months), after which a standard APR applies.

• What is a good interest rate on a credit card?
  

  Now that we’ve answered “How is interest calculated on credit cards,” you likely want to know what a good interest rate actually is. Generally speaking, a “good” interest rate on a credit card is lower than the national average rate. Those with excellent credit scores may be offered interest rates at or below this average.

• What is the average credit card interest rate?
  

  The average credit card interest rate fluctuates frequently, but as of mid-July 2025, it stood at 20.13 percent. As always, the exact rate you get will depend on your creditworthiness and the specific terms of your credit card agreement.

• When do you pay interest on a credit card?
  

  Interest on a credit card is typically charged at the end of each billing cycle. To avoid interest, you must pay your credit card balance in full before the due date. If you only pay the minimum payment amount due, the remaining balance is carried over to the next billing cycle, and you’ll be charged interest on that balance.

  In Q1 2025, 3.05 percent of credit card holders were 30 or more days late on their payments, which could have resulted in accrued interest and late fees, according to the Federal Reserve. Make sure to read your card agreement to understand how interest is calculated and charged, and stay on top of your payment due date to avoid unnecessary charges.

• Do any credit cards or non-purchase transactions incur interest charges immediately?
  

  Non-purchase transactions, such as cash advances and balance transfers, can sometimes incur interest immediately. Additionally, there are some cards that begin charging interest on purchases immediately after the transaction is made.