Credit cards are a fact of life for many Americans. However, with the privilege of buying on credit comes with responsibility of paying interest. Credit card interest is typically higher than mortgage interest or other types of secured debts, such as car loans. It is important to know just how much you are paying in interest when you use your credit card, so you can make wise financial decisions.

Determine Your Interest Rate

Determine your annual interest rate. This number should be listed on your statements that you receive in the mail each month. It should also be listed in the terms of the application when you applied for the card. If you don't see where this number is listed, contact your credit card company using the 800 number on the back of the card and ask the customer service agent. The credit card company may refer to this number as your APR, or annual percentage rate, but be aware your APR may also include other fees, such as loan origination fees.

Type of Balance

Different types of balances may have different interest rates on the same card. For example, if you transfer a balance to the card, you may have a lower interest rate on that transferred balance for a set promotional period. Standard purchases are charged at a certain interest rate as well, while cash advances (using your credit card to get cash) are charged at a much higher percentage rate. Knowing the type of balance you have is essential to determining which interest rate applies. Knowing this information is also important since some credit card companies apply payments to lower interest balances first; however, fair credit laws going into effect in February 2010 will preclude lenders from apply payments this way and will mandate that payments be applied to higher interest rate balances first.

Calculate Monthly Interest

Your annual interest rate is the amount of interest you are charged each year. Knowing your annual rate is helpful, but it can be more advantageous to calculate how much you pay on a monthly basis, since most people do not keep the same balance on their card for a whole year. To find out how much you pay on a monthly basis, divide your annual percentage rate by 12. If you want to be even more precise and find out how much you are charged daily, divide the number by 365 days.

Multiply

Multiply your monthly interest rate by the balance on your credit card. This will tell you how much interest you will pay for the month for the privilege of borrowing the money. You usually have a grace period, from the time you make the charge to the time the statement comes due, to pay off the balance in full and not pay interest. However, if you do not pay off the balance in full, the creditor begins to charge interest from the time the statement is issued and continues to charge interest on that balance until it is paid in full.

Source:

Economy that Works: How to Calculate Finance Charges on a Credit Card

Learner.org: Savings and Credit

Financial Fitness Center: Credit Card Interest Calculator