How a credit card's APR actually works

A credit card's APR is a yearly interest rate, but the interest is worked out day by day. Your card issuer turns the APR into a daily rate and charges it on your balance for each day you carry one. If your card has a grace period and you pay the full statement balance by the due date, you usually pay no interest on purchases.

From a yearly rate to a daily charge

APR stands for annual percentage rate. On a credit card, it's the interest rate for a full year. To use it, most issuers divide the APR by 365 to get what's called the daily periodic rate. A few divide by 360.

Take a 24% APR and a $1,000 balance that stays the same for a 30-day billing cycle.

• The daily rate is 24% divided by 365, or about 0.066%.
• One day of interest on $1,000 is about 66 cents.
• Over 30 days, that adds up to roughly $20.

Real balances go up and down during the month, so many issuers use your average daily balance. They add up your balance at the end of each day and divide by the number of days in the cycle. Many also compound interest daily, which means each day's interest is added to the balance that the next day's interest is charged on. That's why the charge on your statement can come out a little higher than a simple calculation.

Most card APRs are variable. They're tied to an index, usually the prime rate, so your APR can go up or down when that index moves. Your card's terms explain how your rate is set.

The grace period and when interest starts

The grace period is the time between the end of a billing cycle and the payment due date. Under the CARD Act, issuers generally have to send your statement at least 21 days before the payment is due.

If your card has a grace period and you pay the full statement balance by the due date, new purchases don't collect interest. Not every card has one, so check the terms.

If you carry part of the balance into the next month, two things change. You pay interest on the amount you carried, and you usually lose the grace period, so new purchases start collecting interest from the day you make them. You typically get the grace period back by paying the full statement balance again. Your card agreement spells out the exact rule.

Some people are surprised by a small interest charge on the statement after they pay off a balance they'd been carrying. That charge covers the days between the last statement and the day the payment arrived. It's often called residual or trailing interest.

One card, several APRs

A card can have different rates for different kinds of use. Each one is listed in the rate and fee table in your card's terms.

• The purchase APR applies to things you buy with the card. It's the rate people usually mean when they talk about a card's APR.
• The cash advance APR applies when you use the card to get cash, for example at an ATM. It's often higher than the purchase APR, and there's usually no grace period, so interest starts the day you take the cash. Most cards charge a cash advance fee as well.
• The balance transfer APR applies to debt you move over from another card. Some cards offer a lower introductory rate for a set number of months, so check the rate that applies once that period ends.

When you pay more than the minimum, the CARD Act generally requires the issuer to put the extra toward the balance with the highest APR first. The minimum payment itself can go toward a lower-rate balance.

Penalty APR

Some cards switch to a higher penalty APR if you pay late. If a card has one, the rate and fee table shows the rate and what triggers it.

The CARD Act puts limits on this. Issuers generally can't raise the rate on your existing balance unless your payment is more than 60 days late. They can apply a higher rate to new purchases, but they generally have to give you 45 days' notice first. If your rate went up because a payment was more than 60 days late, the issuer generally has to lower it again after six on-time payments in a row.

What to do next

1. Find the rate and fee table for each card you have. It's part of your card agreement and is usually in your online account too.
2. Write down the purchase APR, the cash advance APR and any penalty APR, and note whether the card has a grace period.
3. Look at your last statement to see how much interest you were charged and on what balance.
4. If you can, pay the full statement balance by the due date so new purchases keep their grace period.

The CFPB's credit card pages cover your rights under the CARD Act in more detail.

This guide is general education, not financial advice. Card rates, fees and approval are set by each issuer, so check the issuer's own terms before you apply.