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How is credit card interest calculated?

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Interest for credit cards are normally calculated on a daily basis, but it is not denoted in your account until the very last day of your statement period.

Banks are able to use vast complex systems to determine the interest payable to your account, but commonly the norm would be to charge compound interest daily. An example is the best way to be able to completely comprehend how credit card interest is calculated.

Let's say your statement period runs from the 11th to the 10th of every month. So, the first day of your statement period is March 11, and the last day is April 10.

You start the statement period with an outstanding balance from the previous month of 200, and you make acquisitions of 125 on March 15, 75 on March 19, 80 on March 25, and 190 on April 2.

Your final closing balance is 670, but your total balances throughout that period were:

Day 1 - 4 (March 11-14) = 200 per day, or 800

Day 5 - 9 (March 15-18) = 325 per day, or 1,300

Day 10-15 (March 19-25) = 400 per day, or 2,400

Day 16-23 (March 25-April 1) = 480 per day, or 3,840

Day 24-31 (April 2-10) = 670 per day, or 6,700

Total: 15,040

In working out your average daily balance, you divide this total calculated by the amount of days in the month (31), to get 485.16.

To then calculate the average daily interest rate, the banks divide your annual percentage rate (APR) by the number of days in the year. In a non-leap year of 365 days, and assuming a credit card interest rate of 12.99% per annum, the daily interest rate would be 0.0356%.

The daily interest rate of 0.0356% is then applied to the average daily balance of 485.16, which equates to 17.27 pence per day. After this figure is multiplied by the number of days during the period of the statement - in this particular example, 31 days - we come to the final interest amount payable: 5.35.

When is interest charged?

Interest charged on your credit card account will normally be debited on the final day of your statement period.

If you have a credit card with an interest free period - which is generally up to 25 days after the final day of your statement - no interest will be charged, provided that you pay the entire closing balance by the due date. If you don't pay the full closing balance by the due date, interest will be charged daily from the date of purchase.
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