Credit card interest: how it is calculated and why it matters

Purchases, cash advances and balance transfers can have different rates and fees. A variable APR changes with an index under the agreement. A fixed APR does not move with an index, but “fixed” does not mean the rate can never change.

For a US business-purpose card, use the actual agreement and current statement. Consumer-card legal protections do not all apply in the same way to business-purpose cards.

Many issuers calculate interest using daily balances. Suppose an account has an 18.25% APR and uses a 365-day divisor. Its daily rate is 18.25% ÷ 365 = 0.05%, or 0.0005 as a decimal.

The 18.25% APR is assumed, not offered. Actual day counts, balance rules, compounding, payment posting and rounding depend on the agreement.

The average daily balance is $1,050: (($1,200 × 15) + ($900 × 15)) ÷ 30. If the balance had stayed at $1,200 for all 30 days, interest would be $18.00 under the same assumptions. The earlier balance reduction saves $2.25.

A purchase grace period runs between the end of a billing cycle and the payment due date. Eligible purchases may avoid interest if the required balance is paid in full. Carrying a balance can affect eligibility, and cash advances commonly start accruing interest without a purchase-style grace period.

Check the conditions for keeping or restoring the grace period. Do not assume that paying the minimum meets a pay-in-full condition. If interest is already accruing, ask the issuer which amount and payment date will clear it; the statement balance was calculated at a particular point in time.

If you plan to repay a purchase over time, compare its expected benefit with the borrowing cost on a realistic repayment schedule. Rewards do not remove interest charges. For an introductory rate, check what applies after it expires.

In the example, the $300 payment reduces principal; the $15.75 of interest is an additional cost. Use expected payment dates when estimating a larger or longer balance. Multiplying the starting balance by the APR alone may not match the bill.

Find the APR for each transaction type, whether it can change and what rate follows any promotion. Check the balance and day-count method, grace-period conditions and fees charged in addition to interest.

Confirm when payments are credited and whether the repayment schedule is affordable. Ask the issuer about anything unclear on the actual account. These calculations concern cards that charge interest on carried balances; some business-card products do not permit a revolving balance.