The formula behind the number on your statement
The common method is average daily balance: the card averages your balance across each day of the billing cycle, then applies the daily rate for every day. On a $5,000 balance at 18% APR over 30 days, the daily rate is 0.0493%, so the charge is about 5,000 × 0.000493 × 30 = $74. A longer month costs more — a 31-day cycle charges more than a 28-day one on the same balance.
Finance charge on a 30-day cycle
| Balance | 15% APR | 20% APR | 25% APR |
|---|---|---|---|
| $1,000 | $12.33 | $16.44 | $20.55 |
| $2,500 | $30.82 | $41.10 | $51.37 |
| $5,000 | $61.64 | $82.19 | $102.74 |
| $10,000 | $123.29 | $164.38 | $205.48 |
This is one month only. Left unpaid, the charge is added to the balance and the next month is calculated on the larger figure, so the cost compounds.
What people get wrong
- The grace period is all-or-nothing. Pay the statement balance in full and the charge is usually $0. Carry even part of it and interest applies, often back to the purchase date.
- Paying the minimum is expensive. The minimum barely covers interest, so the balance and its finance charge stay high for years.
- APR is not the effective rate. Because charges compound, the real yearly cost (APY / EAR) is higher than the stated APR.
Common questions
How do I turn an APR into a daily rate?
Divide the APR by 365. An 18% APR is a daily periodic rate of 18 / 365 = 0.0493% per day, which is what the balance is charged for each day of the cycle.
How do I avoid a finance charge entirely?
Pay the full statement balance within the grace period, usually 21 to 25 days. If you carry any balance past the due date, most cards charge interest and you can also lose the grace period on new purchases.
Is the finance charge the same as interest?
Mostly. The finance charge is the cost of borrowing and is almost all interest, but it can also fold in some fees such as a late fee, depending on the card.
