How card interest is actually billed
Interest on a credit card is charged by the day, not by the month. The issuer computes a daily periodic rate — your APR divided by 365 — and applies it to the balance standing on each day of the billing cycle. Because your balance changes as purchases post and payments clear, the issuer averages those daily balances and charges the rate on the average.
That is the whole method, and it has three consequences that surprise people.
The statement balance is not the billed balance. The number printed at the top of your statement is a snapshot on one day. Interest is charged on the average of thirty days. If your balance spiked and fell inside the cycle, the two figures will differ considerably.
Timing changes the charge. A $500 payment posted on day 5 removes $500 from the balance for 26 days; the same payment on day 25 removes it for only 6. At a 24.99% APR the difference is $500 × 20 days × 0.0006847 = $6.85 on that one payment. Pay earlier and you are billed less, with no change to the amount you paid.
New purchases usually count. Most issuers use the average daily balance including new purchases, so a charge made on day 3 accrues interest for the rest of the cycle. A minority exclude new purchases, which produces a smaller charge for identical activity. Which method applies is stated in your cardholder agreement and is required to be disclosed under Regulation Z.
The one thing that overrides all of it is the grace period. If you paid the previous statement balance in full by its due date, purchases in the current cycle are not charged interest at all, provided the new balance is also paid in full. Lose that status by revolving once, and interest is charged from the transaction date until you regain it — which typically takes two consecutive statements paid in full.
The arithmetic, step by step
Step one: the daily periodic rate. Divide the APR by 365. A 24.99% card has a DPR of 0.0684658% a day, or 0.000684658 as a decimal. Some agreements divide by 360 instead, which makes each day 1.4% more expensive than the 365 convention implies; check yours.
Step two: the sum of daily balances. Walk through the cycle day by day. Start with the previous closing balance, add each purchase on the day it posts, subtract each payment on the day it clears, and record the balance at the end of each day. Add all those balances together. A credit balance counts as zero — the issuer does not pay you interest.
Step three: the average. Divide the sum by the number of days in the cycle. Cycles are not all the same length; a 28-day cycle and a 31-day cycle differ by more than 10% in the multiplier.
Step four: the charge. Multiply the average daily balance by the daily periodic rate and by the number of days.
Notice what cancels. Because you multiply the average by the number of days, the finance charge is exactly the daily rate applied to the sum of daily balances. The averaging step is presentational — issuers report it because it is the figure Regulation Z requires them to disclose, but the charge is really just a per-day accrual added up.
The method does not compound within the cycle. Interest is calculated once, at the end, on balances that do not themselves include the interest being calculated. Compounding happens between cycles: this month's finance charge joins next month's opening balance and accrues from day one.
Worked example: a 30-day cycle at 20%
You start the cycle owing $1,000. On day 10 a $600 purchase posts. On day 20 a $300 payment clears. The APR is 20% and the cycle is 30 days.
- Daily periodic rate. 20% ÷ 365 = 0.0547945% a day, or 0.000547945.
- Segment one, days 1 to 9. Balance $1,000 for 9 days = $9,000 of balance-days.
- Segment two, days 10 to 19. Balance $1,600 for 10 days = $16,000.
- Segment three, days 20 to 30. Balance $1,300 for 11 days = $14,300.
- Sum of daily balances. 9,000 + 16,000 + 14,300 = $39,300.
- Average daily balance. 39,300 ÷ 30 = $1,310.
- Finance charge. 1,310 × 0.000547945 × 30 = $21.53.
- Carried forward. The closing balance of $1,300 plus $21.53 of interest = $1,321.53 starts the next cycle.
Two variations are worth running. If the issuer excluded new purchases, the balance-days would be 19 × 1,000 + 11 × 700 = 26,700, an average of $890 and a charge of $14.63 — nearly a third less for identical activity. And if the $300 payment had posted on day 1 instead of day 20, it would have cut the balance for 19 extra days: 300 × 19 × 0.000547945 = $3.12 less interest, for the same $300.
What to do with the number
Check it against your statement. If your calculated charge and the billed charge differ by more than a few cents, the usual causes are a different cycle length, a payment that posted on a different day than you sent it, a 360-day divisor, or a portion of the balance sitting at a different APR. Statements break the finance charge out by balance type — purchases, cash advances, promotional balances — and each has its own rate and its own average daily balance.
Use the interest-per-day figure as a decision rule. It tells you what one more day of carrying the balance costs, which makes small timing decisions concrete. On a $5,000 balance at 24.99%, a day costs $3.42. Moving a payment forward a week saves $23.96.
Read the annual cost of carrying as the real price. Multiply the average daily balance by the APR and you have what the balance costs to keep for a year at that level. That number is the honest comparison against any other use of the money — and it is almost always larger than what an investment would return, which is why paying down revolving debt reliably beats most alternatives.
Get the grace period back. The single largest change available to most cardholders is not a lower rate; it is returning to grace-period status, which takes the finance charge to zero outright. That usually means paying the statement balance in full for two consecutive cycles. Until then, every purchase accrues from the day it posts.
If the balance is large enough that clearing it in a cycle or two is not realistic, the question becomes a payoff plan rather than a billing question. The credit card payoff calculator converts a fixed monthly payment into a payoff date, and the minimum payment calculator shows what happens if you pay only what is demanded.
Interest per $1,000 of average daily balance
| APR | Per day | Per 30-day cycle | Per year |
|---|---|---|---|
| 12.00% | $0.3288 | $9.86 | $120.00 |
| 15.00% | $0.4110 | $12.33 | $150.00 |
| 18.00% | $0.4932 | $14.79 | $180.00 |
| 21.00% | $0.5753 | $17.26 | $210.00 |
| 24.00% | $0.6575 | $19.73 | $240.00 |
| 27.00% | $0.7397 | $22.19 | $270.00 |
| 30.00% | $0.8219 | $24.66 | $300.00 |
The per-year column assumes the balance is held steady and the interest is not itself charged interest. In practice each cycle's finance charge joins the next cycle's opening balance, so a genuinely untouched balance grows faster than the annual column suggests.
What Regulation Z and the CARD Act require
Regulation Z requires the issuer to disclose the balance computation method, the annual percentage rate for each balance type, and the finance charge on the periodic statement. Since the Credit CARD Act of 2009, a statement must be delivered at least 21 days before the payment is due, payments above the minimum must be applied first to the balance carrying the highest rate, and a rate increase generally cannot be applied to an existing balance except in defined circumstances. If a penalty rate has been applied, the issuer must review the account at least every six months and reduce the rate if the conditions that triggered it no longer apply.
Why your calculation and the statement can disagree
- The posting date is not the payment date. Interest stops on the day the issuer credits the payment, which can be later than the day you sent it.
- The cycle is not 30 days. Cycles follow the calendar and run from 28 to 31 days. Use the dates printed on the statement.
- Multiple balance types. Purchases, cash advances, balance transfers and promotional balances each carry their own APR and their own average daily balance. The statement totals them.
- A 360-day divisor. A minority of agreements divide the APR by 360 rather than 365, making each day about 1.4% more expensive.
- Two-cycle billing on the opening balance. Rare and restricted since the CARD Act, but some legacy or non-consumer agreements compute across two cycles.
- Trailing interest. Paying the statement balance in full does not clear interest that accrued between the statement date and the payment date, so a small residual charge appears on the next statement.
- Fees are not interest. Late fees, annual fees and cash advance fees are separate line items that add to the balance without being part of the finance-charge arithmetic.
Where this method sits among the alternatives
The average daily balance method including new purchases is the dominant convention in US consumer card lending, and it sits between two extremes. The adjusted balance method subtracts payments before computing interest and is the most favourable to the cardholder; the previous balance method charges on the opening balance regardless of payments and is the least favourable. Both are now rare. The average daily balance method is a middle path that rewards paying early without ignoring payments entirely.
Understanding it changes three ordinary decisions. It makes clear why paying weekly rather than monthly reduces the charge even when the total paid is identical. It explains why a large purchase early in the cycle costs more than the same purchase late in it. And it shows why the finance charge on a card is not comparable to the interest on an instalment loan, where the rate applies to a declining balance on a fixed schedule — the loan APR calculator handles that case, and the APR it produces is not the same kind of number as a card APR, because card APRs contain no fees.
If the balance is one of several, the ordering question matters more than the arithmetic here: the debt avalanche calculator attacks the highest rate first and minimises total interest, while the debt snowball calculator clears the smallest balance first for the motivational benefit. And where the rates are high enough across several cards, replacing them with a single instalment loan can be worth the origination cost — the debt consolidation loan calculator compares the two directly.