Credit Card Interest Calculator – MoneySense

How to use the credit card interest calculator

Our credit card interest calculator can help you find out two important pieces of information:

• How much money you pay in interest based on your current monthly payment
• How many months will it take to pay off your credit card balance

Start by entering your credit card balance and your card’s annual percentage rate (APR). If you don’t know this number, log into your credit card account and review your card’s terms and conditions.

Then decide whether you want to see how much total interest you’ll pay based on your current monthly payment (and enter that amount) or enter your payout goal in months to see how the total interest will be charged.

How to calculate credit card interest

Because interest is expressed as an annual percentage rate, card issuers take several steps to determine how much to charge each month. Here’s how to find out their method:

1. Convert your APR to a daily rate. Most issuers charge interest daily, so divide the APR by 365 to find the daily periodic interest rate. Make sure you use the purchase rate (not the cash advance or balance transfer rate).
2. Calculate your average daily balance. Check your credit card statement to see how many days are in the billing period. Then add up each day’s daily balance, including the balance carried over from the previous month. Once you have all the daily balances, divide the number by the number of days in the billing period to find your average daily balance.
3. Multiply the balance by the daily rate and then multiply the result by the number of days in the cycle. Now that you have all the necessary data, multiply the average daily balance by your daily periodic interest rate. Then multiply that number by the number of days in the billing cycle. This shows how much interest you pay in a month.

How to avoid paying credit card interest

When you receive a credit card statement each month, you will see a minimum payment amount listed. This is often a flat rate or a small percentage of your balance (usually 3%), whichever is higher.

While it’s tempting to just pay the minimum payment your credit card company asks for, doing so guarantees that you’ll be charged interest because you’re carrying a balance over to the next month.

Instead, make it a point to pay off your balance in full each month. Not only will you avoid paying credit card interest, but your card issuer will also report these payments to the credit reporting agencies, which can improve your credit score. Plus, the cash back or rewards you earn from the card aren’t offset by the interest you’re charged, so you really get more out of using your card.

How to reduce credit card debt

If you already have a credit card balance, don’t despair. There are strategic things you can do to get out of credit card debt.

1. Negotiate with your credit card company

As a first step, call your bank or credit card company to request a lower interest rate. Your card issuer may be willing to work with you, so don’t hesitate to ask. They may agree to lower your rate, offer you to switch to a card with a lower interest rate, or set up a repayment plan that works for your situation, but you’ll never know if you don’t ask.

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2. Make a budget and pay in cash or by card

It is important to keep an honest record of your income and expenses so that you can limit unnecessary costs. Stop charging your credit card for purchases and switch to cash or a debit card instead.

Although it may seem difficult, try contributing to an emergency savings fund. If unexpected costs arise (such as an appliance repair or a vet bill), you can withdraw money from your fund instead of charging your credit card.

3. Open a balance transfer credit card

If you have significant debt, look for a balance transfer credit card with a great promotional rate. Then move your existing balance to the card. You can pay off the balance quickly without being charged any interest. The golden rule of balance transfer cards: never charge the card for new purchases.

4. Try the avalanche or snowball payback strategy

There are two main approaches to paying off debt:

• Avalanche method: Focus on paying off the debt with the highest interest first, while making only the minimum payments on your other accounts. Once the highest interest debt is paid off, move on to the next highest interest debt.
• Snowball method: Start by paying off the debt with the smallest balance first, while continuing to make minimum payments on your other debts. After you pay off one debt, move on to the next smallest balance. This method may cost more in interest over time, but can provide strong motivation and momentum to stay on track with debt payments.

5. Work with a credit counseling agency.

It’s completely understandable to feel overwhelmed by your credit card debt. That’s why a credit advisor can be so helpful. Talk to representatives from your financial institution, a credit counseling agency, or a debt consolidation program to discuss your options. They can help you tailor a plan to resolve the situation.

5. Consider debt consolidation.

If you are combining multiple loans and credit card balances and are having trouble paying them off, it may make sense to consolidate your debts. This means combining two or more debts into one, with only one payment per month.

Another option is a debt consolidation loan from a bank or other financial institution. Or you can work with a credit counseling agency to negotiate a debt consolidation program (DCP) or consumer proposal (where only part of your debt is repaid) with your lenders.

Learn more about each of these options by reading “How to Consolidate Debt in Canada” and “Who Should Canadians Consult for Debt Advice?”