What is Interest Charge?

An interest charge represents the dollar cost associated with borrowing funds or carrying an unpaid balance on a credit card or revolving credit account. Credit card interest is typically calculated daily by converting the account's Annual Percentage Rate (APR) into a Daily Periodic Rate (DPR) (calculated as APR divided by 365 days). This daily rate is then multiplied by the account’s average daily balance, representing the sum of the end-of-day balances divided by the number of days in the billing cycle. Because interest compounding typically occurs daily, carrying an unpaid balance from month to month significantly inflates the overall cost of borrowing.

To avoid interest charges, consumers rely on a credit card's grace period, which is the interest-free window between the statement closing date and the payment due date (federally mandated under the Credit CARD Act of 2009 to be at least 21 days). If a borrower pays their statement balance in full by the due date, no interest charges accrue on new purchases. However, carrying even a fractional balance past the due date revokes the grace period, causing interest to accrue immediately from the transaction date on all new and existing purchases. Most revolving credit interest rates are variable and index-linked to the U.S. Prime Rate. Under Regulation Z, card issuers can also invoke a temporary or permanent 'Penalty APR' (often climbing to 29.99%) if a payment is 60 days or more past due.