Short answer: a credit card applies a periodic rate, such as a daily rate, to a balance figured by a set method, such as the average daily balance. Your account-opening disclosures must explain the method, and each periodic statement must show the balance the rate was applied to and how that balance was found. If you pay the full balance by the due date and your card has a grace period, you may owe no interest on purchases at all. This is general information, not legal or financial advice.
Periodic rate and APR
Regulation Z defines a periodic rate as “a rate of finance charge that is or may be imposed by a creditor on a balance for a day, week, month, or other subdivision of a year” (12 CFR 1026.2(a)(21), eCFR, text up to date as of October 28, 2026, read October 30, 2026). For a card, the APR you see is that periodic rate “multiplied by the number of periods in a year” (12 CFR 1026.14(b), eCFR). So a daily rate is the APR divided by the days in a year.
The official interpretation says a periodic rate “may be based on any portion of a year the creditor chooses”, and that some creditors use 1/360 of the annual rate as a daily rate; a creditor that applies a 1/360 rate for all 365 days “must note that fact” and disclose the true APR (comment 2(a)(21)-1, CFPB, read October 30, 2026). Your card agreement says which divisor your card uses.
Where the method must be explained
- Account-opening disclosures: for each periodic rate, “An explanation of the method used to determine the balance to which the rate is applied” (12 CFR 1026.6(b)(4)(i)(D), eCFR). The official interpretation says a shorthand phrase such as “previous balance method” is not enough on its own (comment 6(b)(4)(i)(D)-1, CFPB).
- Account-opening table: the name of the method from the list in 1026.60(g) for each feature, or an explanation if it is not on the list (1026.6(b)(2)(vi)).
- Card applications and solicitations: the name of the method for purchases (12 CFR 1026.60(b)(6), eCFR).
- Each periodic statement: “The amount of the balance to which a periodic rate was applied and an explanation of how that balance was determined”, and if payments and credits were not deducted first, that fact and their amount (12 CFR 1026.7(b)(5), eCFR).
The balance computation methods by name
Regulation Z lists these names and what each means (12 CFR 1026.60(g)):
| Name | How the balance is figured |
|---|---|
| Average daily balance (including new purchases) | Add the balance for each day in the billing cycle, including new purchases and minus payments and credits, then divide by the number of days in the cycle. |
| Average daily balance (excluding new purchases) | The same, but new purchases are left out. |
| Adjusted balance | The balance at the start of the cycle, minus payments and credits made during the cycle. |
| Previous balance | The balance at the start of the cycle. |
| Daily balance | For each day, the beginning balance plus new purchases minus payments and credits. |
The rule adds that differences such as how payments are allocated, whether interest starts on the transaction date or the posting date, the grace period, and whether the balance includes late fees, annual fees and unpaid finance charges “do not constitute separate balance computation methods” (1026.60(g)). So two cards that use the same name can still give different results; read the full explanation in your agreement. The official interpretation also allows a monthly rate applied to an average daily balance (comment 7(b)(5)-2, CFPB), and for a daily rate on a daily balance, the statement may show the average daily balance and explain that it is multiplied by the days in the cycle and the rate (comment 7(b)(5)-4).
A worked example, only for the math
This example is only for the math. The APR is 22.36%, the Federal Reserve’s average rate for credit card accounts assessed interest in August 2026 (G.19). The balances, the 30-day cycle and the 365-day year are example figures, and the example assumes no grace period applies, for instance because last cycle’s balance was not paid in full.
- Days 1 to 10: balance $1,000.00.
- Day 11: a $300.00 purchase, so days 11 to 20: $1,300.00.
- Day 21: a $500.00 payment, so days 21 to 30: $800.00.
- Daily rate: 22.36% / 365 = 0.06126% (rounded).
Average daily balance including new purchases: ($1,000.00 x 10) + ($1,300.00 x 10) + ($800.00 x 10) = $31,000.00, and $31,000.00 / 30 = $1,033.33. Interest: $31,000.00 x 0.06126% = $18.99, the same as $1,033.33 x 0.06126% x 30 after rounding. Here is the same account under each method, with the same rounded daily rate:
| Method | Balance used | Interest for the cycle |
|---|---|---|
| Average daily balance (including new purchases) | $1,033.33 for 30 days | $18.99 |
| Daily balance (rate applied each day, no daily compounding) | sum of daily balances $31,000.00 | $18.99 |
| Average daily balance (excluding new purchases) | $833.33 for 30 days (sum $25,000.00) | $15.32 |
| Previous balance | $1,000.00 for 30 days | $18.38 |
| Adjusted balance | $1,000.00 minus $500.00 = $500.00 for 30 days | $9.19 |
Your statement shows the real balance and interest; check that the balance shown under 1026.7(b)(5) matches your own count of daily balances.
Grace periods and interest after you pay
Whether new purchases are charged interest at all depends on the grace period. For the rules on when a grace period applies and what the statement must say about it, see credit card grace period rules. For interest that shows up after you pay the statement balance, and the federal ban on two-cycle billing, see credit card trailing interest. For a rate that goes up, see credit card interest rate increase notice.
Questions to ask the card issuer
- Which balance computation method does my account use for purchases, cash advances and balance transfers?
- Is my daily rate the APR divided by 365 or by 360?
- Are unpaid interest and fees added to the balance that interest is charged on?
- Does interest on a purchase start on the transaction date or the posting date?
- What do I need to pay, and by when, to keep or get back my grace period?
Checklist
- Find the balance computation method in your account-opening disclosures or card agreement.
- Find the APR and work out the daily rate.
- On each statement, check the balance the rate was applied to and the interest charged.
- Pay the full balance by the due date if you can, so purchases may not be charged interest.
- Compare the total cost with other options before you carry a balance.
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Sources
- eCFR: 12 CFR 1026.2, Definitions and rules of construction (Regulation Z), current text up to date as of October 28, 2026
- CFPB: Comment for 1026.2, Definitions and Rules of Construction (Official Interpretation, Supplement I to Part 1026)
- eCFR: 12 CFR 1026.14, Determination of annual percentage rate (Regulation Z), current text up to date as of October 28, 2026
- eCFR: 12 CFR 1026.6, Account-opening disclosures (Regulation Z), current text up to date as of October 28, 2026
- CFPB: Comment for 1026.6, Account-Opening Disclosures (Official Interpretation, Supplement I to Part 1026)
- eCFR: 12 CFR 1026.7, Periodic statement (Regulation Z), current text up to date as of October 28, 2026
- CFPB: Comment for 1026.7, Periodic Statement (Official Interpretation, Supplement I to Part 1026)
- eCFR: 12 CFR 1026.60, Credit and charge card applications and solicitations (Regulation Z), current text up to date as of October 28, 2026
- Federal Reserve: G.19 Consumer Credit (released October 7, 2026), terms of credit, August 2026: credit card plans and 24-month personal loans
Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.