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What is a Periodic Rate?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 24 October 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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A periodic rate is the rate of interest that is applied to an outstanding balance within a specified period of time. Rates of this type may be calculated on a daily, weekly, monthly, semiannual, or annual basis. Accounts such as credit cards, revolving credit accounts, and payday loans are examples of financial arrangements that carry this type of finance charge.

Calculating a periodic rate involves identifying the annual percentage rate, or APR, associated with the account. The standard practice is to determine when interest will be applied to the account, and then determine that amount based on the APR. Essentially, this involves determining how frequently the periodic rate will be applied throughout the year, and dividing the APR by that frequency. For example, if a credit card account carries an annual percentage rate of 24%, and the idea is to apply the periodic rate every month in which the account has an outstanding balance, the rate will be 2%. In like manner, if the account is structured with a 24% APR with a quarterly periodic rate, that rate would be set at 6%.

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While many consumers do look closely at the annual percentage rate, they may or may not pay close attention to the periodic rate. This is important, because that rate is identified as a cash amount on each billing statement issued on the account. For people who don’t like to think in terms of percentages, seeing the actual dollar amount that is applied as interest for a given billing period often makes the interest rate very real. If the figure seems to be somewhat high, this means that some factor has led to an increase in the APR, something that is likely to be noted in the small print but overlooked by the consumer.

One of the easiest ways to minimize the periodic rate paid over the course of a year is to keep account balances on credit cards, loans, and other debt instruments as low as possible. It is not unusual for a credit card company to charge no interest at all if the balance on the account is paid in full each statement period. In order to ensure this takes place, it is important to render the payment before the date that interest is assessed for the upcoming billing period. While this often coincides with close of the previous period, consumers should read the terms and conditions of the account clearly and determine if this is the case.

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