# How Credit Card Calculates Interest

December 15th, 2014 Posted in Credit Cards|Rewards Cards|Debts

How Credit Card Calculates Interest

In Canada, credit card company uses mainly two methods to calculate the interest you pay. The methods are, average daily balance method and daily balance method. Although the methods are different, they generate same interest charge. If you are interested finding out which method your card uses, you can call their 800 number or you can find it in your credit card agreement brochure. Now let’s look at these two methods.

Average Daily Balance Method

Your credit card has billing period of 29 to 31 days. Average daily balance is just the average of you daily balance during your billing period. Average daily balance is calculated at the end of every month. Take the balance at the end of every day and add them up (A). Divide this total (A) by the number of days in your billing cycle to get average daily balance (B). B is multiplied by daily interest rate to get average daily interest amount(C). Now, to calculate interest charge for the month, multiply C by the number of days in the billing period.

To get daily interest rate, take annual interest rate and divide by 365. Also, interest rate can be found on your monthly statement.

Daily Balance Method

This method is simpler than average daily balance method. Instead of making one calculation at the month end, daily balance method calculates your interest at the end of every day of the billing period. Calculation method is simple. Take your daily balance and multiply that by the daily interest rate and add up daily interest to obtain interest for the month.

Purchases, Cash Advances and Balance Transfers

If you pay your balance in full, you never pay any interest. If you don’t pay your balance in full, you’re charged interest from the date you made these purchases until they’re paid for in full. Some credit card issuers charge interest from the date the purchases are posted to your account. You’re charged interest from the date you made the cash advance or balance transfer.