How to Calculate Credit Card Interest

Last Reviewed: 8/15/2011

While there are multiple ways that credit card companies could calculate interest (and each of them about as exciting as pistachio pudding), by far and away the most common method (and the one used by Chase, Citi, CapitalOne, Amex and BofA for starters) is the “average daily balance” approach.  While we explain how the method works in detail below, here is a snapshot of some major banks and the methods they use.

Method Used by Major Credit Card Providers to Calculate Interest Charges
Issuer Method Implications
Chase Average daily balance
Discover Average daily balance with daily interest compounding Bad for the consumer since you end up paying interest on interest.
Citi Average daily balance
American Express Average daily balance
CapitalOne Average daily balance
Bank of America Average daily balance with daily interest compounding Bad for the consumer since you end up paying interest on interest.

PlasticIQ will walk you through an actual example from my August Chase credit card statement (see screenshots right below), to clearly illustrate how banks calculate your interest rate charges. We’ll also point out a few interesting observations along the way.

Step-By-Step: Calculating Interest on My Credit Card

The basic recipe for calculating interest under the average daily balance method is as follows:

  1. Start with the outstanding balance from the prior month (that’s the yellow cell in the screenshot below).
  2. Add to that balance, on a daily basis, the sum total of any purchases for that given day and subtract any payments or credits.
    • Note that Discover and Bank of America are the only major card issuers in the group listed above that also add in the previous day’s interest in calculating the next day’s ending balance. This means you end up paying interest on interest. While this is sneaky, it doesn’t add up very much (in my example below, it results in only 2 or 3 pennies of additional interest per month. Even for someone carrying 10x the balances, the impact would only be $0.20 or $0.30 per month.
  3. At the end of each day, take that balance and multiply it by the daily periodic rate (DPR) (see immediately below on how to calculate the DPR). The result will be the interest accrued for that given day.
    • To calculate the DPR, take the APR on the card (for my card, it’s 14.24%), and divide by 365 (# of days in the year). That’s it!
  4. Repeat this process for each day of your billing statement (31 days in my example), and then add up the interest for all 31 days to figure out how much interest you owe the bank.

List of My Daily Chase Credit Card Purchases and Interest Rate Calculations

I Paid my Balance in Full, But I Was Still Charged Interest the Next Month

Yes, it is possible, and highly likely, that even if you pay off your balance in full (let’s assume you were already carrying a balance in the previous billing cycle), you could still see interest on your new statement. This would happen if you didn’t pay off your balance on the immediate day when the billing cycle closed.

For example, let’s assume your statement cycle is from the 1st of June to the 30th. Let’s assume at the end of the cycle you owe $1,000 (including any interest charged), and you pay off the full $1,000 on the 5th of July. Let’s also assume you make no purchases in July. When you get your July statement, you’ll actually have some interest to pay off! This is because you were incurring interest on the $1,000 balance from July 1 through July 4.

Concluding Thoughts

Well, hopefully you are a bit wiser on how credit card issuers actually calculate the interest you owe them. Also, remember, you should never carry interest-incurring balances on credit cards. If you find yourself in this situation, and can’t pay off the balances, I strongly recommend transferring your balances to a 0% APR card. You can read our post on PlasticIQ’s top picks for balance transfer offers to get some good leads.

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