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How To Calculate The APR On A Credit Card

The are two primary ways with which to calculate the Annual Percentage Rate, or APR, for credit cards. The daily periodic rate and the monthly periodic rate are similar but also different enough that larger balances could lead to increased costs or costs savings depending on which one is used. Understanding the basics could make a difference when negotiating terms with a credit card issuer.

It is easy to determine which rate is currently used. One the reverse side of your current statement are a list of terms which apply to your credit card. This list specifies various attributes like the grace period and certain fees. It will also list the current Annual Percentage Rate and well as whether or not it is a daily or monthly calculation. Once you have this information you can calculate what your interest expense is and verify if it matches what is on the front of the credit card statement.

The monthly periodic interest rate is as easy as it sounds. Take the APR that appears of the statement and divide it by 12. So if the APR is 12% then the monthly periodic rate will be 1% every month. You can then calculate the monthly finance charge by multiplying the outstanding balance of $1,000 by .01 (10% by moving the decimal point two place to the left) which will return and monthly finance charge of $10.

The daily periodic interest rate is a little more complicated to calculate but it is similar in nature. Take that same APR of 12% but now divide it by 365, the number of days in a year, which will return .03% per day. You can calculate the finance charges for the month by multiplying the daily interest rate times the number of days in the billing cycle times the balance. For example, take .03 times 31 which returns 1.02% times the $1000 balance. As you can see, the finance charge is slightly higher at $10.20.

Understanding how the Annual Percentage Rate is calculated is important to ultimately making wise financial decisions. It may not seem like a lot of money when talking about smaller balances but it really starts to add up when balances get significantly larger. Credit card companies hope consumers don't know how their accounts work but with some basic information you can take control back and use the credit that is best for you.