How to Calculate Interest with APR

With anything containing numbers, there is a usually a formula to solve it. Here are the steps to calculate the amount of interest you have to pay on your outstanding balance. 

Steps

1. Take your APR and divide it by 365 (numbers of days in a year) to get a daily periodic rate (DPR)
2. The DPR is then multiplied by the amount of days the outstanding balance have incurred 
3. That amount is then multiplied by the amount of outstanding balance you owe
4. The result is the amount of interest that is additional to your outstanding balance

Graphical Steps

Source: Bank of America

Example calculation
Purchase APR: 20% = 0.20
Outstanding balance: $10,000
Days incurred: 1 day

What is an APR

You probably see/hear the word "APR" all the time from credit card offers in the mail or car commercials on TV, but do you know what it means and how it works?

APR stands for annual percentage rate. These APR comes in different ranges depending on the kind of debt and your credit score. These rate are very variable and can fluctuate with the market.

Banks use an annual percentage rate to calculate a daily periodic rate that they will charge compound interest on your outstanding balance (that have no been paid of in full) on a daily basis.

You can usually find these APR towards the end of your banking statements.

Types of APR
Introductory (Promotional) APR
Usually 0%, which means there is no interest on your purchases for a limited amount of time (varies from 9-18 months).

Purchase APR
Usually after the promotional rate that varies from 12-24% depending on credit score.

Balance Transfers APR
Usually the same rate as the Purchase APR.

Cash Advance APR
Usually higher than Purchase and Balance Transfer APR (>24%). This occurs when you withdraw cash from an ATM with your credit card instead of debit card.

Penalty APR
Usually the highest APR due to late payments or violating the card terms and conditions (>24%).