The annual percentage rate (APR) for a credit card or loan is the annual price of borrowing money and is the way credit card companies are required to disclose credit card pricing. However, most credit card issuers calculate and charge interest periodically—daily, monthly, or quarterly—so billing statements may contain a periodic rate.
A periodic rate is the APR expressed over a shorter period and can be found by dividing the APR by the number of billing periods in the year. A daily periodic rate is calculated by dividing the APR by 365 days (or 360 for some companies); a monthly periodic rate is calculated by dividing the APR by 12 months; a quarterly periodic rate is calculated by dividing the APR by four. For example, a credit card with an APR of 12% would have a daily periodic rate of 0.03287671%, a monthly periodic rate of 1%, and a quarterly periodic rate of 3%.
If your credit card issuer uses a periodic rate to calculate your finance charges, you'll see the 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; it's smaller than the APR because the periods are smaller than one year. The rates are equal.
When the Daily Rate Is Used
Many credit card issuers calculate finance charges based on the cardholder's daily balance. 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 number of days in the billing cycle.
As an example, let's assume that your credit card balance is $1,000 for the first 10 days of a month, and then you make a $300 payment and carry a $700 balance for the next 10 days. After that, you make a $200 payment and carry a $500 balance through the remaining 10 days of the month. Your average daily balance could be calculated using the following formula:
$1,000 x 10 days = $10,000
$700 x 10 days = $7,000
$500 x 10 days = $5,000
$10,000 + $7,000 + $5,000 = $22,000 / 30 days = $733.33 average daily balance (ADB). If your APR is 15%, your daily percentage rate (DPR) would be 0.041096%.
$733.33 ADB x 0.00041096 DPR x 30 days = $9.04
If your credit card issuer uses the daily balance method—where 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.
When You Pay
For any purchases made during a billing cycle, which is typically 30 days, you'll have a grace period between 21–28 days before your payment is due. If you pay your statement in full during that time, you won't have to worry about paying interest. For example, if your credit card billing period is between March 25 and April 24, with a due date of May 21, any purchases made within that time period will be interest-free, as long as the balance is paid in full by May 21.
Your APR 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. If you pay your statement off in full each billing cycle, you won't pay any interest. There are five types of APRs:
- Purchase: The standard rate charged as discussed in this article.
- Balance Transfer: The interest applied to a balance that is transferred between credit cards.
- Introductory: A temporary promotional interest rate that companies use to attract new companies. It's typically 0%.
- Cash Advance: The rate charged to the cash borrowed from your credit card company.
- Penalty: If your credit card payment is more than 60 days past due, you could face an extra interest charge.