How Credit Card Interest Is Calculated

Short answer: Credit card interest often depends on a periodic rate applied to balances during a billing cycle. APR is one input; balance method and timing determine the charge more precisely.

Convert APR to a periodic rate

An agreement can describe a daily periodic rate derived from APR. Issuers generally divide APR by 360 or 365, depending on their method. A simplified monthly orientation divides APR by 12.

For 24% APR, a simplified monthly rate is 2%. A daily estimate using 365 days begins near 0.06575% per day, before considering the issuer’s stated method and rounding.

The balance can change every day

Account activity and payments can change the balance used in a calculation. A payment made earlier in the cycle can reduce the balance for more days than the same payment made later.

This timing effect is why multiplying the ending statement balance by APR divided by 12 may not reproduce the statement charge.

Average daily balance concept

One general method adds the applicable balance for each day and divides by the number of days in the billing cycle. The periodic rate is then applied according to the agreement.

Suppose a balance is $1,000 for 15 days and $500 for 15 days. The illustrative average daily balance is ($1,000 × 15 + $500 × 15) ÷ 30 = $750.

Transaction categories can differ

Purchases, cash advances, credit card checks, and other transaction categories can have different APRs. A single combined estimate can be wrong if it applies one rate to every category.

Use estimates for scale, statements for actual charges

The interest calculator uses APR divided by 12 and an entered average balance. It is intentionally simpler than an issuer statement calculation. Verify an actual charge using the statement and agreement.