Your card’s APR looks like a yearly number, but most issuers charge interest every day. Once you see how credit card interest is calculated, it’s easier to see why a balance grows and what stops it.
This guide uses rules and explanations from the Consumer Financial Protection Bureau (CFPB).
APR and the daily rate
Your annual percentage rate (APR) is the yearly cost of borrowing on your card. Most issuers turn it into a daily periodic rate by dividing the APR by 365. Some divide by 360.
For a card with a 24% APR:
- 24% ÷ 365 = about 0.0658% per day
That daily rate gets applied to your balance for each day of the billing cycle.
A card can have several APRs at once: one for purchases, one for balance transfers, one for cash advances, and sometimes a promotional rate. Your statement lists each one.
The average daily balance method
The CFPB says many issuers use the average daily balance. The issuer adds up your balance at the end of each day in the billing cycle and divides by the number of days.
Here’s an example with a 30-day billing cycle and a 24% APR:
- Days 1 to 10: balance of $1,000
- Day 11: you make a $400 payment, and the balance drops to $600 for days 11 to 20
- Day 21: you buy something for $300, and the balance is $900 for days 21 to 30
Average daily balance: ($1,000 × 10 + $600 × 10 + $900 × 10) ÷ 30 = $833.33
Interest for the month: $833.33 × 0.000658 × 30 = about $16.45
Two lessons come out of this math:
- Paying earlier in the cycle lowers your interest. Your payment on day 11 cut the balance for 20 days. The same payment on day 29 would have helped for two.
- New purchases add interest right away if you already carry a balance, because they raise your average.
Some issuers compound daily, which means yesterday’s interest becomes part of today’s balance. The effect is small over one month and adds up over a year.
How the grace period works
A grace period is the time between the end of your billing cycle and your due date. If you pay your full statement balance by the due date, you usually pay no interest on new purchases.
The CFPB points out a few catches:
- Card issuers aren’t required to offer a grace period. Most do, and your card agreement says whether yours does.
- The grace period usually covers only new purchases. Cash advances and most balance transfers start charging interest on the day of the transaction.
- If you carry any balance past the due date, you can lose the grace period. You may pay interest on new purchases for that month and the next one, until you pay in full again.
Your issuer has to mail or deliver your bill at least 21 days before the payment due date.
This is why “paying in full” means the full statement balance, not the minimum. Our guide on missing a grace period deadline explains what happens when you slip.
Where your payment goes
If you have balances at different rates, the CFPB says your issuer can apply the minimum payment however it chooses, usually to the lowest-rate balance. Any amount above the minimum has to go to the balance with the highest APR first.
So if you have a 0% balance transfer and a 25% purchase balance, paying more than the minimum is the only way to attack the 25% balance.
Penalty APRs and rate increases
Your issuer can raise your rate in some cases, with rules:
- Penalty APR. If you’re more than 60 days late, your issuer can apply a penalty APR to your existing balance. It has to give you 45 days’ notice. If you then make six on-time minimum payments in a row, the issuer has to restore your old rate on that balance.
- Other increases. For most rate increases, the issuer has to give you 45 days’ notice. If it raises your rate, it has to review your account at least every six months to see whether it should lower it again.
- Variable rates move with an index, such as the prime rate, and can change without the 45-day notice.
If you get a notice of a rate increase, you may have the right to reject it. You’d close the card to new purchases and pay off the balance under the old terms.
How to pay less interest
- Pay the full statement balance each month to keep your grace period.
- Pay early or more than once a month. Each payment lowers your average daily balance.
- Stop using the card while you pay down a balance, so new purchases don’t add to the average.
- Ask for a lower rate. See our guide on negotiating a lower credit card APR.
- Move the balance to a lower rate. Compare balance transfer cards with consolidation loans. Watch the transfer fee and the date the promo rate ends.
- Avoid cash advances. They start charging interest the same day and often carry a higher APR plus a fee.
Lower balances also help your credit. See how credit utilization affects your score.
Check your own numbers
Your monthly statement lists your APRs, the interest you paid this month and this year, and a box showing how long it will take to pay off your balance with minimum payments only. Read that box once. It’s the fastest way to see what interest costs you.
To plan a payoff date, try our debt payoff calculator. More credit guides are in the Credit Center.
