Credit card interest, usually expressed as an annual percentage rate (APR), is the rate you’re charged on any unpaid balances each month.
Card issuers may charge interest when you don’t pay your full statement balance by the due date. They may also immediately start charging interest on things like cash advances. Your card may have a different interest rate for different types of credit card debt, such as balance transfers, purchases and cash advances.
Always check your card’s terms to understand how different interest rates are applied.
Here are some different ways credit card companies can calculate monthly interest charges. Let’s look at how 2 common methods work– the daily balance method and the average daily balance method.
Daily balance method
This method calculates interest by multiplying the balance on a credit card each day in the billing cycle by a “daily periodic rate,” which is the APR that applies to that balance divided by 365.
If the credit card issuer compounds interest daily under this method, the interest charged from the prior day will be added to the balance of the current day. That balance will be multiplied by the daily periodic rate to determine the interest charged for the current day. If the issuer does not compound interest under this method, the interest charged from the prior day will not be added to the calculation for the current day balance.
The interest charges for each day in the billing cycle are added together to determine the total interest for that balance in the billing cycle.
Average daily balance method
While some credit card issuers use the daily balance method, others may use the average daily balance method. Here’s how it works:
Convert the annual percentage rate to the daily periodic rate
First, calculate the daily periodic rate by dividing your APR by 365, the number of days in a year.
Determine your average daily balance
Next, check which days are included in the billing period. Interest charges depend on the balance on each of those days, so you’ll need to record what your daily balance was on each day during the billing period.
Add up all the daily balances and divide them by the number of days in the billing period. This is your average daily balance.
Calculate your credit card interest
Finally, multiply the average daily balance by the daily periodic rate and the number of days in the billing period. This is your total interest for that billing period.
Average daily balance with compounding interest
Issuers may also use a variation of the average daily balance method that includes compounded daily interest from the previous day. If the credit card issuer compounds interest daily under this method, the prior day’s interest charge is added to your daily balance.
Other ways of calculating credit card interest
The methods above, while common, aren’t the only ways credit card companies calculate interest. Other methods include the adjusted balance method, which accounts for the balance at the end of your previous billing period minus any payments and credits made during the current billing period. Purchases made during the current billing cycle are excluded from the calculation.
Issuers may also use the previous balance method, which calculates interest based on the total balance at the end of your previous billing cycle. Payments, credits, and charges made during the current billing cycle are not factored in.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
