Understanding Daily and Monthly Periodic Rates
Most borrowers are familiar with the annual percentage rate, or APR, for a credit card or loan. This rate represents the annual price of borrowing money and is the way credit card are required to disclose credit card pricing. However, most credit card issuers calculate and charge interest on a periodic basis, e.g. daily, monthly, or sometimes even quarterly, so billing statements may contain a periodic rate.
A periodic rate is the APR expressed over a (shorter) period of time. You can calculate the periodic rate by dividing the APR by the number of billing periods in the year. For example, a monthly periodic rate is calculated based on the APR divided by the number of months in a year, or 12. A credit card with an APR of 12% would have a monthly periodic rate of 1%. A quarterly periodic rate would be the APR divided by 4 because there are four quarters in each year.
If your credit card issuer uses a periodic rate to calculate your finance charges, you’ll see this periodic rate on your credit card billing statement. The periodic rate is a smaller number than the APR, but that doesn’t mean you’re paying less interest. The periodic rate is smaller than the APR because the periods are smaller than one year. The rates are equal.
The Rate Defined
Many credit card issuers calculate finance charges based on the cardholder’s daily balance. The daily periodic rate, sometimes called the daily rate, is a type of periodic rate that’s applied to your daily balance or average daily balance to calculate your credit card finance charge, depending on the method your credit card issuer uses for finance charge calculations.
How to Calculate
Your daily periodic rate calculation is the APR divided by the number of days in the year (or by 360 with some credit card issuers, according to the Consumer Financial Protection Bureau). For example, if your annual percentage rate is 15.9% and there are 365 days in the year, your daily periodic rate would be 0.0043%. That’s (.159 / 365) X 100.
When the Daily Rate Is Used
If your credit card issuer uses the average daily balance method to calculate your finance charge, your credit card balance is averaged over the entire billing cycle, then multiplied by the daily rate and the number of days in the billing cycle.
Or, if your credit card issuer uses the daily balance method (your credit card daily balances are not averaged), the credit card issuer multiplies the daily balance for each day in the billing cycle by the daily rate for a daily finance charge. Then, the daily finance charges are totaled to get a finance charge for the billing cycle.
The APR is Still Matters
While the periodic rate is the rate that’s used to calculate your finance charges, the APR is still the best number to use to compare credit cards. The APR lets you know whether one credit card is more expensive than another if you choose to carry a balance.