Introduction
Credit card interest is calculated daily, not monthly. Understanding the average daily balance method explains why partial payments still incur charges and why the grace period is the single most valuable feature on any card.
Definition
Credit card interest is the finance charge a cardholder pays for borrowing money beyond the grace period. It is expressed as an Annual Percentage Rate (APR) but applied daily.
Why It Matters
The U.S. CFPB reports the average credit card APR exceeds 21%. A $5,000 balance held flat costs roughly $1,050/year — more than most rewards programs return.
How It Works
- Daily Periodic Rate (DPR) = APR ÷ 365
- Each day, your balance is multiplied by the DPR and added to accrued interest.
- At cycle close, the Average Daily Balance (ADB) is computed and multiplied by DPR × days in cycle.
- The grace period waives interest on new purchases if the prior statement was paid in full by the due date.
Formula
Daily Periodic Rate
$$ \text{DPR} = \frac{\text{APR}}{365} $$
Finance Charge (Average Daily Balance method)
$$ \text{Interest} = \text{ADB} \times \text{DPR} \times \text{Days in Cycle} $$
Average Daily Balance
$$ \text{ADB} = \frac{\sum \text{Daily Balances}}{\text{Days in Cycle}} $$
Variable Definitions
- APR — annualized interest rate stated in the cardholder agreement
- ADB — sum of each day's ending balance divided by days in cycle
- Days in Cycle — typically 28–31
Worked Example
- APR: 22.99%, DPR: 22.99 ÷ 365 = 0.06298%
- Cycle: 30 days
- ADB: $2,000
Interest = 2000 × 0.0006298 × 30 = $37.79
If the cardholder pays only $50 toward this $2,000 balance, interest still accrues on $1,950 the next cycle.
Grace Period Mechanics
If the prior statement balance is paid in full by the due date, new purchases in the next cycle accrue no interest until that cycle's due date. Carrying any balance into the next cycle eliminates the grace period until you again pay in full.
Common Mistakes
- Paying minimum only — extends payoff to 15+ years
- Assuming grace period applies when carrying a balance
- Confusing introductory 0% APR with permanent rate
- Cash advances — no grace period, higher APR, immediate interest
Cash Advances and Penalty APR
| Charge Type | Typical APR | Grace Period |
|---|---|---|
| Purchases | 18%–28% | Yes (if paid in full) |
| Cash advance | 25%–30% | No |
| Penalty APR | up to 29.99% | No |
Related Calculators
Related Articles
Conclusion
The only sustainable strategy is paying the statement balance in full every month. At 22% APR, $1 of interest costs more than $1 of rewards earned on $50 of spend — the math never favors the borrower.