Credit cards take borrowed funds from a line of credit. A line of credit is a certain amount of money a financial institution, like a bank, will allow you to use.
Every billing cycle, the bank will send you a statement outlining your total balance, the minimum payment, and the total amount of interest that will be charged.
Keep in mind, if you pay your full balance on time, you will not be charged interest and will not carry any credit card debt.
Credit cards come with an annual percentage rate (APR) which helps determine the interest you will pay. Credit card interest is calculated using your average daily balance and daily interest rate.
To get the daily interest rate, most banks divide the APR by 365. For example, a 15% APR would equate to 0.041% per day.
Average daily balance is the average amount of credit you used during that billing period (typically 30 days). Let’s say you make a $1500 purchase on June 1. Then, on June 16, you pay $400 of that, bringing your balance to $1100 until June 30. For 15 days your balance was $1500 and for another 15 days your balance was $1100.
($1500 * 15 = $22,500) and ($1100 * 15 = $16,500) = $39,000/30 = $1300
The above calculation shows your average daily balance of $1300. From there take your daily APR of 0.041% and multiply that by 30 (for each day in the billing period) to get 1.23%.
You would pay $15.99 in interest for that period if you didn’t pay the balance in full.
APR and calculation methods vary by bank, be sure to check with your bank to get more accurate explanations.