Theannual percentage rate(APR) for a credit card or loan is the annual price of borrowing money and is the way credit card companies arerequired to disclose credit card pricing. However, most credit card issuers calculate and charge interest periodically—daily, monthly, or quarterly—sobilling statementsmay contain a periodic rate.
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 tocalculate 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 theaverage daily balance methodto 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 thedaily 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 tocarry 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.
FAQs
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.
What is the periodic rate on a credit card? ›
A daily periodic rate defines the amount of interest you are paying on your credit card balance at the end of each day. Each credit card has a different APR or DPR and these rates could vary between issuers due to many factors.
Are credit card interest rates monthly or daily? ›
Credit cards actually charge interest daily, not monthly
Most people don't realize exactly how the compound interest on their credit card is calculated and credit card companies rely on that fact.
What is the monthly or daily rate charged on a credit card balance called? ›
When you carry a balance from month to month, interest is accrued on a daily basis, based on what's called the Daily Periodic Rate (DPR). DPR is just another way of saying what your daily interest charge is, and is calculated by taking your credit card's APR and dividing it by 365, for all the days in the year.
Is daily compounding better than monthly? ›
Most high-yield savings accounts compound interest daily and pay it out monthly. While interest compounded daily can get you greater returns than interest compounded monthly or annually, the difference isn't substantial. For your savings to grow, the more important factors are the APY and the length of time you save.
How to figure daily periodic rate? ›
Daily periodic rate example calculation
Let's say one of the credit cards in your wallet carries an APR of 19.99%. You can figure out the daily periodic rate by dividing the APR by 365—or by 360, depending on which number your issuer uses. If you divide 19.99% by 365, you get 0.0548%.
What is a good interest rate on a credit card? ›
A good credit card APR is a rate that's at or below the national average, which currently sits above 20 percent. While there are credit cards with APRs below 10 percent, they are most often found at credit unions or small local banks. If you don't have good credit, you're likely to receive a higher credit card APR.
Is APR the same as periodic rate? ›
These lenders often quote an annual percentage rate (APR), glossing over this daily periodic rate calculation. You can identify your daily periodic rate by dividing the APR by 365, although some lenders determine daily periodic rates by dividing by 360.
What determines credit card rates? ›
The interest on most credit cards is variable and will change from time to time. Some cards have multiple interest rates, such as one for purchases and another for cash advances. Your credit score can affect the interest rate you'll pay as well as which cards you may qualify to use.
Why am I getting charged interest when my balance is zero? ›
Have you ever paid your credit card balance down and then found an unexpected interest charge on the next bill? That may be residual interest. Residual interest, also known as trailing interest is, in the most basic terms, the interest that's carried over billing cycles.
Here's a checklist of some things to look at when you choose a credit card:
- Annual Percentage Rate (APR). This is the cost of borrowing on the card, if you don't pay the whole balance off each month. ...
- minimum repayment. ...
- annual fee. ...
- charges. ...
- introductory interest rates. ...
- loyalty points or rewards. ...
- cash back.
If your credit score is between 725 to 759 it's likely to be considered very good. A credit score of 760 and above is generally considered to be an excellent credit score. The credit score range is anywhere between 300 to 900. The higher your score, the better your credit rating.
What is a monthly periodic rate on a credit card? ›
Depending on the card, your interest may be calculated monthly or daily. To calculate your monthly APR, divide your current APR by 12 (the number of months in a year). This gives you your monthly periodic rate. Then multiply that number by the amount of your current balance to get your monthly APR.
What is the best credit card usage rate? ›
A general rule of thumb is to keep your credit utilization ratio below 30%. And if you really want to be an overachiever, aim for 10%. According to Experian, people who keep their credit utilization under 10% for each of their cards also tend to have exceptional credit scores (a FICO® Score☉ of 800 or higher).
When should I pay my credit card bill to avoid interest? ›
Paying off your monthly statement balances in full each month is the path to avoiding credit card debt. As long as you pay off your statement balance in full, your grace period kicks in and you can make purchases on your credit card without paying interest until the next statement due date.
What is periodic monthly interest rate? ›
Example of a Periodic Interest Rate
The interest on a mortgage is compounded or applied on a monthly basis. If the annual interest rate on that mortgage is 8%, the periodic interest rate used to calculate the interest assessed in any single month is 0.08 divided by 12, working out to 0.0067 or 0.67%.
What is a monthly periodic? ›
Definition. The interest rate factor used to calculate the interest charges on a monthly basis. The factor equals the yearly rate divided by 12.
What is the difference between annual rate and monthly rate? ›
A monthly interest rate is simply how much interest you would be charged in one month. This doesn't include any other charges associated with the loan, and it doesn't show exactly how expensive a loan actually is. APR, on the other hand, is the percentage rate charged on a loan over the term of one year.
What is the difference between the annual interest rate and the daily interest rate? ›
The APR is the annual rate, and the interest rate that you are charged each day is the daily periodic rate, based on your APR.
