When it comes to budgeting and managing your finances, having an understanding of credit card interest is essential. Interest, or the rate that banks charge to lend you money, is an important factor to consider when using credit cards. The average American likely has several credit cards and probably pays at least a little bit of interest on them each month. Understanding how credit card interest is calculated can help you take back control of your finances and, most importantly, save money.

Credit Card
Credit card interest statistics
  • As of March 2023, the average credit card interest rate is 20.92 (Federal Reserve)
  • Every year, Americans pay $120 billion in both credit card interest and fees (CFPB)
  • 35 percent of U.S. adults carry debt on their credit card debt from month to month (Bankrate)
  • 43 percent of the adults that carry credit card debt don’t know the interest rates attached to their cards (Bankrate)
  • 2.25 percent of credit card holders at the end of 2022 were 30+ days late on their credit card payment, therefore accruing interest and potential late fees (Federal Reserve)

How does credit card interest work?

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 happens, 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 APR.

The APR is calculated by taking the annual percentage rate divided by 365 and applying it to the daily balance. 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.

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 average amount in your credit card account for a given billing period. Most credit card companies calculate the average daily balance by taking the sum of the balance on each day of the billing period, and then dividing that number by the number of days in the billing period.

For example, if your monthly credit card purchases totaled $552 and there are 31 days in the month, you would divide $552 by 31 to find your average spending per day. In this case, that would be $17.81.

3. Determine your interest charges

Once you have your daily rate and the 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 our example from above. Take your daily rate of 0.052 and your average daily balance of $17.81 and multiply them.

0.052 x 17.81 = 0.93

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

0.93 x 31 = 28.83

So, you’ll pay $28.83 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:

  • Credit history
  • Credit score
  • Payment history
  • Other factors listed on your credit report.

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

The type of credit card you have/are applying for can also influence the APR. For example, a rewards card may have a higher APR than a standard credit card 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.
  • 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.
  • 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. As of March 2023, the Federal Reserve reports the average credit card interest rate to be 20.92 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.
    • The lowest credit card interest rate currently available is an introductory 0 percent APR. However, this rate is only available on promotional offers and is not available to all consumers.