What is your blended interest rate?

If you owe money in several places, it is natural to want one rate for all of it. That rate is the blended rate. It is easy to calculate, and easy to misread because of how it is built.

How the blend is calculated

A blended rate is a weighted average. Each debt's rate counts in proportion to its balance:

Take a $2,000 credit card at 24% and a $300,000 mortgage at 6%. Multiply each balance by its rate, add the results, and divide by the $302,000 total. The answer is about 6.12%.

That number is correct: 6.12% on $302,000 is exactly the interest you pay now. It is also nearly useless as a description of these debts. It sits almost on top of the mortgage rate, and a 24% card has disappeared into it.

This is not a flaw in the arithmetic. It is what weighting by balance means. The mortgage is more than 99% of what is owed, so it gets more than 99% of the say in the average. The card could charge 36% and the blend would only move to about 6.2%.

A large cheap debt hides a small expensive one

The pattern is general. Whenever your biggest balance is also one of your cheapest, the blend is pulled toward that low rate, and every small, expensive debt is diluted by it. A mortgage beside a few credit cards is the usual case.

So the blended rate answers one question well — what the whole pile costs, per dollar owed — and answers a different question badly: which parts of the pile are expensive. For the second question you need a different measurement.

The figure that shows where the interest comes from

Instead of averaging the rates, split the monthly interest. For each debt, balance × rate ÷ 12 is roughly what it costs you this month. Add those up and you have your total monthly interest in dollars, which is often the more striking number of the two. Then divide each debt's interest by that total. That is its share of the interest.

Set that share beside the debt's share of the balance and the blend's blind spot shows up at once. Here is a more realistic list:

• Mortgage: $285,000 at 6.5%
• Student loan: $26,800 at 5.8%
• Car loan: $21,400 at 7.4%
• Credit card: $7,900 at 24.99%
• Store card: $1,650 at 29.99%

Together these blend to 7.04% and cost about $2,011 a month in interest. The two cards are 2.8% of what is owed and 10.2% of the interest. The credit card alone ranks second on the list, ahead of the car loan and the student loan, which owe $21,400 and $26,800. The blend moved by less than a point to account for all of that.

Neither number is wrong. The blended rate is right about the whole, and the share of interest is right about the parts. You need both to read the situation accurately. The blended interest rate calculator shows them side by side, ranked by monthly interest, with a bar for each share so the gap between them is visible.

Where your payment goes

If you know your monthly payments, there is one more split worth making. Each month, the interest for that month is charged first, and only what is left of the payment reduces the balance. On the list above, $164 of a $240 card payment is interest. That is about 69%, so the balance falls by about $76.

That split depends on the balance and the rate, not on the payment. A higher payment does not lower this month's interest; it only raises the part that is left over. If the payment is at or below the month's interest, nothing is left and the balance never comes down. The calculator flags any debt where that is true.

A blended rate is not an effective rate

The two are easy to confuse and measure different things. A blended rate describes debts you already carry, averaged together. An effective rate describes a single loan: what it really costs once the points and fees you paid to get it are counted, over the years you keep it. The effective interest rate calculator works that out for one offer. It will not tell you anything about a list of balances, and this one will not price a loan offer.

Neither figure says what order to repay things in. The debt payoff calculator compares the two usual answers to that on the same list of debts.

The blended rate is a fair summary of what your debt costs overall. Just don't read it as a description of each debt. Check the share of interest each debt is responsible for before drawing conclusions from it.

Sources: arithmetic — the blended rate is the balance-weighted mean, and monthly interest is estimated as balance × rate ÷ 12. How a card issuer actually applies its rate is disclosed on every statement under Regulation Z § 1026.7(b)(4)–(5), which require each periodic rate to be shown as an annual percentage rate along with the "Balance Subject to Interest Rate" it was applied to.