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The interest charged to your balance is determined by a few key factors, such as the credit balance, the annual percentage rate (APR), and the grace period given for payment in full.
For example, let's assume that you have just gotten a new card, and used it to buy a new water heater for your home (for $1000). This puts a balance of $1000 on the credit card. The APR for the card is 20%, and the payment is due in 30 days.
To determine the interest charged to your account, the bank first calculates the amount of money that balance would accrue for a year, using the annual percentage rate. For our example, that means $1000 would generate $200 in interest per year. The bank then takes the annual figure and divides it by 365 to determine exactly how much interest accrues each day. Dividing the amount $200 by 365 results in approximately 55 cents per day.
The bank then calculates the interest per billing by multiplying the daily interest by the number of days in the grace period. Therefore, 55 cents per day times 30 days would yield $16.50 in interest for the billing period. This is the amount that you will be charged if you do not pay the balance in full by the due date on the bill.
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