How Credit Card Interest Works – Part 2

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Trying to get to the bottom of your credit card bill? We’ve got you covered. Financial expert Eric Rosenberg shares some tips for how to use your credit card responsibly and how to calculate your monthly interest rate. Watch the video or read the transcript to follow. 

Eric Rosenberg:

Hey, everyone. Welcome back for part two of our series on credit card interest. 

We’re going to jump in now with my favorite tip on how to save money when using credit cards. If you use a credit card responsibly and pay it off in full every month, you’ll never have to pay any interest. You should always do this when possible. Interest charges are something that you pay for borrowing funds from one month to the next. So if you pay that credit card balance off in full by the due date, you’re not borrowing from month to month, and you don’t have to pay any interest.

Now there’s a common myth out there that you have to carry a balance and pay interest to build your credit, and that’s simply not true. The best way to build credit is to keep your credit card balances as close to zero as possible. To keep the bank from closing your account, you might want to use it at least every three to six months for a small purchase. Maybe you have a recurring online subscription, you use your credit card for that and set it up for automatic payments. So you’ll never miss a payment. That’ll help you build credit, well, making it easy to pay for that online purchase. Just make sure you don’t make purchases you can’t afford to pay off in full by the next statement due date.

Now let’s look at the math behind interest calculations. Don’t worry, we’re going to make this easier on you than high school math, and we’re not going to test you at the end. You should be able to easily find how much you’re being charged and why on your credit card statement. So grab one of your statements. You can find it online, or if you get them in the mail, you can grab one from your most recent mailing, and you can look at it and you will see a clear breakdown on any charges on there. If you have any questions, you should call the number on your statement or on the back of your credit card to ask, because that is their job. You shouldn’t pay fees that you don’t understand.

To calculate interest, banks use this process that you can go through yourself. First, find your APR, that’s your interest rate, and the ending balance on your latest credit card statement. They might use that ending balance or they might use what’s called a daily average balance. It should be clearly listed on your statement. Next, you’re going to divide your APR, that’s your interest rate, by 365 for 365 days in a year, and that is your daily periodic interest rate.

Finally, you’ll multiply that daily interest rate times your ending balance or your daily average balance, whatever your credit card company uses, and that number should give you your monthly interest charge. Again, if you pay off your credit card in full by the due date, you’ll never have to pay interest. Wow, would you look at that? We’re out of time again, come back for part three where we’ll wrap up our series on how you can save money with credit card interest and other tips to get out of credit card debt.