Key takeaways

  • Credit card interest can add up quickly, so it's important to know how it’s calculated and when it will hit your account.
  • Most issuers use an average daily balance with compounding formula to determine how much interest you owe.
  • There are ways to reduce the amount of interest you owe on a credit card balance.

The average American has between three to four credit cards, and roughly half of these cardholders carry a balance from month to month — meaning they likely accrue interest on their purchases. Understanding how this interest is calculated can help you take back control of your finances. And, most importantly, save money.

Interest, or the rate that banks charge to lend you money, is an important factor to consider when using credit cards. Here, we’ll cover how interest is calculated — and how you can use these calculations to more responsibly manage your budget and finances.

Credit Card
Credit card interest statistics
  • As of November 2023, the average credit card interest rate is 22.75 (Federal Reserve)
  • Americans paid $130 billion in both credit card interest and fees in 2022, the most recent year for which data is available (Consumer Financial Protection Bureau)
  • 58 percent of U.S. cardholders carrying a credit card balance have been in debt for a year or more (Bankrate)
  • 43 percent of the adults that carry credit card debt don’t know the interest rates attached to their cards (Bankrate)
  • 2.98 percent of credit card holders at the end of September 2023 were 30+ days late on their credit card payments, therefore accruing interest and potential late fees (Federal Reserve)

How does credit card interest work?

In most cases, credit card interest is charged when you don’t pay your full balance by the deadline and decide to carry a balance from month to month.

When this occurs, the credit card company will calculate how much you owe at the end of each billing cycle. This is usually done by taking the balance you owe on the first day of each billing cycle and applying a percentage-based annual interest rate — or the APR.

The APR is calculated by taking the annual percentage rate divided by 365 and applying it to the daily balance and repeating that process daily throughout the billing cycle. The interest is then added to the balance on the first day of the next billing cycle, which is your new balance subject to interest. This process is repeated each month if you don’t pay off your balance in full.

If you regularly carry a balance from month to month, a 0 percent APR credit card can be an effective way to save money on interest. A 0 percent intro APR allows you to not incur any interest for a specified period, usually from a year to up to 21 months. This means if you pay off any purchases made during that period in full within the given timeframe, you won’t be charged any interest.

Additionally, if you transfer a balance from a higher-interest credit card, you can save the difference in interest by paying off the balance during the 0 percent intro APR period (though you’ll want to take potential balance transfer fees into consideration when deciding whether transferring your debt is worth it).

APR vs. interest rates

The terms APR and interest rates are often used interchangeably when talking about credit cards. However, there are some differences. The annual percentage rate (APR) is the cost of credit on a yearly basis and includes both the interest rate and any applicable fees. It’s expressed as a percentage and is the most widely used rate to compare credit products.

Interest rates are typically associated more with mortgages and other types of loans. An interest rate is just the cost of borrowing money, expressed as a percentage of the loan principal, and it doesn’t include any other charges.

How is credit card interest calculated?

Let’s get down to the burning question: How does interest work on a credit card?

When trying to understand how credit card interest is calculated, it’s important to understand the different factors that go into it. Credit card interest is the price you pay for using someone else’s money to make purchases. It’s calculated based on your annual percentage rate (APR), which is the interest rate based on an annual basis, as well as your average daily balance.

1. Convert the annual rate to the daily rate

Credit card interest is usually expressed as an APR, which is a yearly rate. This is then broken down into a daily rate, so you can calculate the amount of interest you will be charged for any given day. To convert an APR to a daily rate, divide the APR by 365, the number of days in a year.

Let’s say you have good credit, so you have a relatively low rate of 19 percent (compared to the current average card interest rate). Divide that by 365:

19 / 365 = 0.052

This means your daily rate is 0.052 percent.

2. Calculate your average daily balance

Your average daily balance is the amount you owe on your card at the end of each day, divided by the number of days in your billing cycle.

Your credit card balance fluctuates throughout a billing cycle based on new purchases or returns, any fees you’re assessed (such as foreign transaction fees), as well as any mid-cycle payments you make. If your credit card issuer uses a compounding interest formula to assess interest (as most of them do), your daily balance will also include any interest accrued from the prior day’s balance.

You can calculate your own average daily balance by looking at your credit card statement and adding or subtracting transactions from each day to find each day’s balance (don’t forget to add in the daily interest you figured in Step 1 if your bank uses a compounding interest model). Then, add all those daily balances together and divide that figure by the number of days in your billing cycle. The result will be your average daily balance.

3. Determine your interest charges

Once you have your daily rate and your average daily balance, you can calculate your interest charges by multiplying the two numbers together and then multiplying that number by the number of days in the billing period. This equation will give you the total amount of interest charges you will be charged for the given billing period.

Let’s wrap up with an example. Take your daily rate of 0.052 from above and let’s assume an average daily balance of $22.81. Now, multiply them.

0.052 x 22.81 = 0.93

Next, multiply that by 31 since that’s the number of days in the billing cycle.

0.93 x 31 = 36.77

So, you’ll pay $36.77 in interest charges that month.

How do card issuers determine interest rates?

Card issuers determine credit card interest rates (APRs) based on several factors, including your:

  • Credit history
  • Credit score
  • Payment history

Generally speaking, if you have a good credit score or excellent score, you’re going to qualify for a lower interest rate. The lower your score, the higher your rate is likely to be.

The type of credit card you’re applying for can also influence the APR. For example, rewards cards are likely to have higher APRs than non-rewards cards due to the added benefits these cards offer. Additionally, some cards have introductory APRs that are lower than the standard APR but increase over time.

How to lower your credit card interest rate

Most credit card issuers offer the opportunity to lower the interest rate charged on your credit card balance. Here are some steps you can take to reduce your credit card interest rate:

  • Pay your bill in full each month. By paying your credit card bill in full each month before the due date, you can avoid interest charges and lower your overall cost of credit Note that this assumes your card isn’t one of the few that charges interest immediately when making a purchase; these cards are rare, but are out there so read your terms carefully.
  • Make more than the minimum payment. Making more than the minimum payment each month can also help to reduce your credit card interest rate. By doing this, you could pay off your balance faster and reduce the overall amount of interest you’re charged.
  • Make multiple payments each month. Making multiple payments in the same month will reduce your average daily balance, which will, in turn reduce the interest you’ll be charged.
  • Ask for a lower rate. If you’ve improved your credit score and are in good standing with your issuer, you may qualify for a lower interest rate on your current card or qualify for one of today’s best credit cards. Contact your issuer to request a lower rate and negotiate a new rate that works for both parties.
  • Consider transferring your balance. If you have a balance on multiple credit cards, you may be able to transfer the balance from your higher-rate cards to a new lower-rate card, reducing your overall interest charges.
  • Shop around for a better rate. You may be able to find a lower interest rate with a different credit card issuer. Do your research to find a credit card with competitive interest rates and terms.


  • Now that we’ve answered “how is interest calculated on credit cards,” you likely want to know what a good interest rate actually is. Generally speaking, a “good” interest rate on a credit card is one that is lower than the national average rate. Those with excellent credit scores may be offered interest rates at or below this average.
  • The average credit card interest rate changes frequently, though it’s currently at 20.74 percent. As always, the exact rate you get will depend on your creditworthiness and the specific terms of your credit card agreement.
  • Interest on a credit card is typically charged at the end of each billing cycle. To avoid interest, you must pay off your credit card balance in full before the due date. If you only pay the minimum payment amount due, the remaining balance is carried over to the next billing cycle, and you’ll be charged interest on that balance. Non-purchase transactions, such as cash advances and sometimes balance transfers, can begin accruing interest immediately. Additionally, there are cards that begin charging interest on purchases immediately when the transaction is made.
  • The lowest credit card interest rate currently available are introductory 0 percent APRs. However, these rates are only available on an introductory or promotional basis and are not available to all consumers — or even to all cardholders of the same product.