If you’ve ever checked your credit card statement, you might notice a smaller interest rate labeled as the periodic interest rate, different from the Annual Percentage Rate (APR) you usually see. The periodic interest rate is the actual rate lenders use to calculate the interest charged for a specific time frame, like a month or a day.
How the Periodic Interest Rate Works
Lenders calculate interest charges in shorter periods rather than annually. They convert the APR into a periodic interest rate by dividing the APR by the number of billing periods in a year. Depending on the lender, periods can be monthly or daily.
- For monthly calculations, divide the APR by 12.
- For daily calculations, divide the APR by 365.
This periodic rate is then applied to your average daily balance or outstanding balance for that period to compute the interest you owe.
Example: Calculating Credit Card Interest
Suppose your credit card has a 21% APR.
- Monthly periodic rate = 21% ÷ 12 = 1.75%
- If your average daily balance for the month is $2,000, your interest charge is:
$2,000 × 0.0175 = $35
Some cards, like those for cash advances, may calculate interest daily. In that case:
- Daily periodic rate = 21% ÷ 365 ≈ 0.0575%
Daily compounding means interest is added to your balance each day, which can increase costs over time.
Periodic Interest Rate vs. APR
While APR represents the total cost of borrowing over one year, including fees, the periodic interest rate is the rate actually used to calculate interest charges for each billing cycle. APR serves as a comparison tool for loans and credit cards, while the periodic rate impacts your monthly or daily statements directly.
| Feature | APR | Periodic Interest Rate |
|---|---|---|
| Timeframe | Annual | Monthly or Daily |
| Purpose | Shows yearly borrowing cost including fees | Calculates actual interest each billing period |
| Use | Comparing loan offers | Determining interest charge |
Where to Find the Periodic Interest Rate
Lenders must disclose the periodic interest rate to comply with the Truth in Lending Act. You can typically find it:
- On your credit card statement under “Interest Charge Calculation”
- In your credit card or loan agreement, often in the pricing details section
Why Understanding Your Periodic Interest Rate Matters
Knowing your periodic interest rate helps you understand how much interest you’ll owe in each billing cycle. It also helps you see the effect of daily versus monthly compounding, which can affect how much debt grows over time.
For more details on related terms like APR (Annual Percentage Rate) or how interest accrues Interest Accrual, visit FinHelp’s glossary.
Sources:
- Consumer Financial Protection Bureau, Understanding Credit Card Rates
- Investopedia, How to Calculate Credit Card Interest
- Truth in Lending Act disclosures requirements (12 CFR Part 1026)