How Is the Monthly Interest Calculated on My Credit Card?

Average Daily Balance Method

The average daily balance is the most common method of calculating the balance on a credit card at the end of each month. The balance on the credit card is recorded at the end of each day. These daily balances are totaled at the end of the month, and the sum is divided by the number of the days in the month. This quotient is the average daily balance for that month.

Adjusted Balance Method

The adjusted balance method uses the ending balance from the previous month. All credits and payments that are made during the current month are subtracted from the previous month’s balance. Purchases made during the current month aren’t considered. This method has the advantage of not being charged for purchases until the following month.

Previous Balance Method

The previous balance method simply uses the ending balance from the previous month without making any modifications. The disadvantage of this method is that you won’t be credited for payments until the following month. However, it also means that you won’t be penalized for purchases until the following month.

Monthly Interest Rate

The annual percentage rate (APR) for the credit card is divided by 100 to convert the APR to a decimal fraction. This value is then divided by 12 to obtain the monthly interest rate for the credit card. For example, a credit card with an APR of 18 percent has an annual interest rate of 18/100 = 0.18. The monthly interest rate on this card would therefore be 0.18/12 = 0.015.

Calculations

The monthly balance is calculated with the method that the credit card company uses. This balance is multiplied by the monthly interest rate to obtain the interest on the credit card for that month.

About this Author

Allan Robinson holds a bachelor’s degree with majors in biology andmathematics. He has written numerous health articles for sitessuch as eHow and LIVESTRONG. Robinson also has 15 years experience asa software engineer and has extensive accreditations in softwareengineering.