What is the daily periodic rate?

It is your annual percentage rate divided by the number of days in the year, usually 365, giving the rate charged for a single day. The issuer applies it to your balance each day of the billing cycle and adds the results together, so the rate itself is tiny and the number of days it is applied to is what makes the charge.

Why does paying early in the cycle cost less than paying on the due date?

Because interest is charged per day on the balance standing that day. A payment made on day 5 removes that money from the balance for the remaining days of the cycle, while the same payment on day 28 removes it for almost none. The amount paid is identical and the number of interest-charged days is not.

Is average daily balance the same as my statement balance?

No. Your statement balance is the amount standing when the cycle closed, on one specific day. Your average daily balance is the average across every day of the cycle, so a purchase made and repaid inside the cycle can raise the average while leaving the statement balance unchanged.

If I pay in full every month, does any of this matter?

Not for purchases, because the grace period keeps them interest-free while you pay the statement balance in full. It matters as soon as you carry a balance, and it matters immediately for cash advances, which typically have no grace period at all.

Average Daily Balance: How Card Interest Works

Most issuers divide your APR by 365 to get a daily periodic rate, apply that rate to your balance on each day of the billing cycle, and add the daily charges together at the end. The number that matters is therefore your average balance across the cycle, not the balance on any single day. This is why a payment made early in the cycle costs you less than the same payment made on the due date.

Most people picture card interest as one multiplication at the end of the month. Balance times rate, divided by twelve. The real method produces a different number, and it explains a line on your statement that otherwise looks arbitrary.

The method

The CFPB describes what issuers actually do: "Many credit card companies calculate the interest you owe daily, based on your average daily account balance." ¹ The rate applied each day has a name, and the same guidance gives it: "The interest charged daily is called the daily periodic rate." ¹

The CFPB's glossary describes how that rate is used, as a rate "used to calculate interest by multiplying the rate by the amount owed at the end of the day". ²

So the calculation has three parts.

Divide the APR by 365 to get the rate for a single day.
Apply that rate to the balance standing at the end of each day in the cycle.
Add the daily charges together to get the interest for the cycle.

Your balance is not one number across a month. It is roughly thirty numbers, and the interest is computed against all of them.

A worked example

Example numbers for the method, not a quote of any issuer's APR.

Suppose a 30 day billing cycle and an illustrative purchase APR of 21.99%. The daily periodic rate is that APR over 365, so about 0.060247% a day.

Days in cycle	End-of-day balance
Days 1 to 10	$2,000
Days 11 to 30	$1,000

The average daily balance is 10 times $2,000 plus 20 times $1,000, all over 30, which is $1,333.33. The interest for the cycle is $1,333.33 times 0.00060247 times 30, which is about $24.10.

Now move the same $1,000 payment to day 28 instead of day 10. The balance stays near $2,000 for almost the whole cycle, so the average rises and the interest rises with it, on the same APR and the same payment amount. Timing changes the bill even when the dollars paid do not.

Why the day you pay changes the bill

This is the practical consequence, and it is the reason the method is worth knowing.

Consider a balance carried through a 30 day cycle, and a payment you are going to make either way. Made on day 5, that payment removes its amount from the balance for the 25 days that follow, so 25 days of daily interest are never charged on it. Made on day 28, it removes the same amount for 2 days.

Same payment, same cycle, same APR. The interest differs because the number of days the money sat in the balance differs.

The CFPB states the implication directly: because interest accrues daily, "if you don't have a grace period, the sooner you pay off all or some of your balance, the less interest you will pay". ¹ That condition is worth checking first, because none of this arithmetic runs while you still hold the interest-free window: see what is a grace period on a credit card.

What this rules out

A common shortcut is to divide a balance by a monthly payment and call the result a payoff. That gives a month count on the assumption that nothing is added to the balance while you repay, which is exactly what interest does.

The shortcut is not a rough version of the right answer. It omits the mechanism that makes repayment slow, so it understates both the time and the cost, and it understates them more the higher the rate.

Any calculator worth using has to walk the cycle day by day and add interest to the balance as it goes. CardLab's interest and payoff calculators use the average daily balance method for this reason, and they are free in the browser with no sign-up, so the arithmetic can be checked against your own statement rather than taken on trust.

Reading your own statement

Two figures on the statement let you verify the method.

The interest charge for the cycle, usually broken out by transaction type, since purchases and cash advances carry different rates.
The number of days in the billing cycle, which is what the daily rate was applied across.

If the interest charge looks larger than your closing balance would suggest, the balance was higher earlier in the cycle than it was at the end. The average is what you were charged on, and the closing figure is just the last of the days.

How is credit card interest actually calculated?