How to Calculate Credit Card APR?

Posted on 08 July 2009

If you are having a credit card for more than a month, then you might have noticed that your purchases are charged interest. Those cards which have no grace period, purchases are charged interest from the moment the purchase is made; while those having grace period (typically 21 days or so) at least give you some time to pay off the balance before that they begin charging interest on the remaining balance.


Here the thing that is really very important is that you do not fully understand the calculation of APR and that how the finance charges are included in it.

Every Credit Card Company Use Different Method to Calculate APR

All the Credit Card Companies don’t follow one-size-fits-all program for calculating your APR. According to law, it is the responsibility of the Credit Card Company to send you a written statement regarding how much you are charged in interest, and also the method which they’re using to calculate the interest. Typically it is written in a light-weight paper booklet that is received by you when you first receive the card and then after you receive it again whenever any change is made in the terms of your card.

APR Calculation May be Fixed or Variable

If you are one of the lucky individuals that have got a fixed interest rate credit card and its interest rates has actually remained fixed throughout all of the economic downturns, you are being charged the same interest rate that is whatever it was stated to be when you opened the account.


A variable interest rate is charged by other credit cards. It is based on the prime rate, plus anywhere from 2 to 7% more, this is a number that is selected by the bank and it is often a result of your personal credit score and payment history. The variable rate shows big fluctuations, it depends on circumstances of the economy, as well.

Outstanding Balances Charged the Periodic Rate

The number of billing periods in a year (typically, 12 months) is divided by your annual percentage rate (APR). 12 months are divided by a 24% APR to give you a periodic rate of 2%. To get the periodic rate for the month this periodic rate is multiplied by your outstanding balance. Don’t think that it is as simple as taking your full balance owed on the credit card and multiplying it by the  periodic percentage rate.

Methods to Determine the Total Balance that Charge the Periodic Rate

There are several methods by which we can determine that how much of your total balance is charged the periodic rate:

Adjusted Balance:

This method used to determine the total balance that charge the periodic rate   is one of the ideal methods of calculation, it is because your balance is adjusted such that it reflects the payments you made during the billing cycle. Your balance that will be charged the periodic rate for any purchases made within the same billing cycle is not increased by it. If you were having a balance of $2,200 and $200 payment had been made by you during the billing cycle, and you were charged $140 during the same billing cycle, then you will be charged the periodic rate on a $2,000 balance.

balance calculation

Average Daily Balance:

The credit cards that use the average daily balance method, in order to determine the balance they add the balances on each day of the billing cycle and then divide them by the number of days in the billing cycle in order to get the average daily balance on the card. Payments made by you are subtracted from the balances and purchases are added.

Two-Cycle Average Daily Balance:

Your payments are not accounted by this method right away, what it means is that if you start making larger payments in order to reduce your balance, you will not see a big different in the amount that you’re paying right away. Those credit cards that use this method add the account balance on each day of the last two billing cycles and then they are divided by the number of days in those two billing cycles.

Previous Balance:

This is calculated by applying the periodic rate to the beginning balance at the beginning of the billing cycle. This methods of calculation is not affected by your purchases and payments made during the same billing cycle.

Ending Balance:

The only thing that matters in this calculation is the ending balance at the end of the billing cycle. This method of calculation is not affected by your purchases and payments made within the same billing cycle, unless it affects the actual balance on the last day of the billing cycle. The difficult thing about this method is that the billing cycles of credit cards are not an exact day each month means that many have billing cycles that are “between 20 and 25 days in length” so you will never be able to know that which day they are calculating the balance, but you can guess that they’re picking that day when the balance is at it’s highest level if you’ve just made a payment!

To have knowledge of how your credit card calculates your APR charges is very important to selecting a card which offers the best rates to keep your costs of borrowing money lower.

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