Your credit card has an Annual Percentage Rate (APR), which is “an annual percentage rate of interest a credit card holder will be charged on all or a portion of the balance if the full amount isn’t paid on or before the due date” according to Bankrate.com. But interest isn’t always charged annually. Sometimes, it’s calculated to reflect interest charges over a shorter period of time (daily, monthly, or quarterly), termed a “daily periodic rate.”
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Using the Daily Balance Method to Calculate Interest
Simply put, the daily periodic rate (DPR) is the APR divided by 365 (some credit card issuers divide by 360). 1Â So, if your APR is 15%, your DPR is .0411%. This daily periodic rate calculator can help you determine your rate and how much interest you’d owe on your outstanding balance.
Now, while your rate is the same, the amount you’ll owe in interest may be different because your credit card issuer calculates interest on a daily basis instead of monthly or yearly.
The more often interest is calculated, the faster it will accrue. When interest is calculated daily, the interest accrued each day is added to the previous day’s total. The next day, both the principal and the first day’s interest are accruing interest. On day three, the principal, interest from day one and interest from day two will accrue interest (and so on).
Doing the Math
Here’s an example of how to calculate interest using the daily balance method. Suppose you carry a $1,000 balance on your credit card for a year, without adding to it or paying off any part of it. The credit card has an APR of 15%, which equals a DPR of .041%.
Using DPR, that debt will grow to $1,161.39.
So, while you might be aware of your card’s APR, your credit card might actually be calculating interest using the daily balance method. 2
How to Be a More Informed Consumer
Credit card companies are required to disclose the APR on credit card applications and when you receive a new card. 2Â Your billing statements also may inform you of your periodic rate. It’s important to read the fine print, especially if you expect to carry a credit card balance.
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As you can see, the way interest charges are calculated can make a difference in the amount of interest you’ll actually pay. By informing yourself of your credit card’s terms, you’ll be in a better position to budget for payments.