When you get your monthly statement from the credit card company, it includes a calculation of your interest over the period, which is represented as a monetary value. How does the bank come to calculate this monetary value which it charges you an interest? When you acquire a credit card, the interest rate quoted to you is the APR, or Annual Percentage Rate. This interest may be compounded daily, or monthly, and is charged to what is referred to as your Average Daily Balance, or ADB. Most banks use a simple formula based on these two values to determine the monthly interest charged to you.
For example, the bank takes the APR, which is the percentage of interest expressed as a fraction – for instance, 14/100 for 14% – times the ADB over 365 days, times the number of days the credit has revolved (for instance, 30 if the interest is calculated monthly. So to calculate your interest, take the APR and divide it by 100, then multiply it by the amount of the daily balance, divided by 365, then take this total and multiply it by the number of days it has been since you made payment on the account. Thus, you will get your monthly interest amount.
If you have different balance segments at different interest rates – for example, if a portion of your balance is put toward a cash advance, or a balance transfer – your charges can be much more complicated. In that event, when several interest rates may apply, the allocation of payment is generally at the bank’s discretion, and they may allocate your payment toward the portion with the lowest interest first, thus leaving the higher interest balance – for instance, the cash advance balance – in place to collect more interest.
As the rates and terms may vary, it pays to look into how much you might be able to save by making a credit card balance transfer to a low interest credit card.