What Is the Periodic Interest on a Credit Card With a 17.99% APR?

Periodic interest is the rate applied to your credit card balance over recurring intervals, typically daily. While credit card interest rates are quoted annually, the actual interest you pay is determined by applying a smaller, daily rate to your outstanding balance. This daily calculation allows credit card issuers to account for the exact amount owed each day, reflecting charges, payments, and credits as they occur.

Understanding Annual Percentage Rate

The Annual Percentage Rate (APR) represents the yearly cost of borrowing money on a credit card. For most users, the APR primarily reflects the interest rate charged on outstanding balances. This rate is expressed as a percentage and can be fixed or variable, fluctuating based on an index like the prime rate.

Credit card issuers may apply different APRs depending on the type of transaction. Purchases, cash advances, and balance transfers can each have their own distinct APR. A cash advance APR often begins accruing interest immediately, without a grace period, and may be higher than the purchase APR. Introductory or promotional APRs might also apply for a limited time before converting to a standard variable rate.

Calculating Periodic Interest

Periodic interest is derived directly from the credit card’s Annual Percentage Rate. To convert the APR into a daily periodic rate, the APR is divided by the number of days in a year, typically 365 or sometimes 360. This conversion yields the fractional rate applied each day to the outstanding balance.

For example, with a credit card APR of 17.99%, the daily periodic rate is calculated by dividing 0.1799 by 365. This results in a daily periodic rate of approximately 0.00049287, or 0.049287%. This small daily rate is then applied to the average daily balance to determine the interest charge for a billing cycle.

To illustrate, if the average daily balance for a billing cycle was $500, the daily interest would be $500 multiplied by 0.00049287, which equals approximately $0.246. This daily interest amount is then added to the balance, leading to daily compounding. The total periodic interest for the billing cycle is the sum of these daily interest amounts over the entire cycle.

How Credit Card Interest is Applied

The periodic interest calculated is applied to a credit card account using the average daily balance method. This method involves summing the outstanding balance for each day within a billing cycle and then dividing that total by the number of days in that cycle to arrive at the average daily balance. Any new charges, payments, or credits made throughout the billing period affect the daily balance, which influences the overall average.

The grace period allows cardholders to avoid interest charges on new purchases. This period extends from the end of a billing cycle to the payment due date. If the full balance from the previous billing cycle is paid by the due date, no interest is charged on new purchases made during the current cycle.

Grace periods do not apply to cash advances or balance transfers; interest begins accruing immediately on these transactions. If any portion of the previous balance is carried over or a payment is late, the grace period is forfeited, and interest then applies to new purchases from the transaction date. The final interest charge, along with other fees, is itemized on the monthly credit card statement.