How Credit Card Interest Is Calculated: Daily Rates, Average Daily Balance, and the Grace Period
Most cards charge interest daily on your average balance, not on your statement balance. Here is the calculation step by step, and how paying in full avoids it entirely.
Credit card interest isn't charged once a month on your statement balance. Most cards calculate interest daily, using an average daily balance over the billing cycle. Knowing how it works shows why paying in full matters and why the timing of payments can change what you owe.
The basic method
Some cards divide by 360 instead of 365, and some compound daily. The cardholder agreement explains the method.
A worked example
A hypothetical card with a 24% APR and a 30-day billing cycle, carrying a balance from the prior month:
- Days 1–14: balance of $3,000
- Day 15: a $500 purchase, balance $3,500 for days 15–19
- Day 20: a $1,000 payment, balance $2,500 for days 20–30
Show the numbers behind this chart
| Day of billing cycle | Daily balance | Average daily balance |
|---|---|---|
| 1 | $3,000 | $2,900 |
| 5 | $3,000 | $2,900 |
| 10 | $3,000 | $2,900 |
| 14 | $3,000 | $2,900 |
| 15 | $3,500 | $2,900 |
| 19 | $3,500 | $2,900 |
| 20 | $2,500 | $2,900 |
| 25 | $2,500 | $2,900 |
| 30 | $2,500 | $2,900 |
If the $1,000 payment had come on day 1 instead of day 20, the average balance, and the interest, would have been lower.
The grace period
Most cards offer a grace period on purchases: if you pay the full statement balance by the due date, you're not charged interest on new purchases. Once you carry a balance, you typically lose the grace period, and new purchases start accruing interest right away until you pay in full again, sometimes for more than one cycle.
Cash advances and balance transfers usually don't have a grace period at all.
Ways to reduce interest
- Pay the full statement balance to keep the grace period.
- Pay earlier in the cycle, or more than once a month, to lower the average daily balance.
- Pay more than the minimum; see the minimum payment trap.
- Consider a balance transfer for large balances; see balance transfers.
The takeaway
Card interest is charged daily on your average balance. Paying in full by the due date avoids it on purchases; if you carry a balance, paying earlier and more often lowers the average balance and the interest.
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