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How does credit card interest work?

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women looking at credit card and phone
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If you don’t pay your credit card statement balance in full by your due date, your lender will start charging interest on the unpaid balance. Credit card interest compounds daily, so the amount of interest you owe your lender can quickly become unmanageable.

This is part of the reason you should strive to avoid paying interest if at all possible. But life happens, and you may find yourself with a credit card balance you can’t pay in full.

In that case, it helps to understand exactly how interest is calculated, how it plays a role in your monthly payment and how you can minimize these extra charges.

What is credit card interest, and why does it matter?

Credit card interest is an extra charge you pay when you carry a credit card balance. Think of it as a fee you pay to a lender for allowing you to borrow money.

Credit card interest matters because this added cost makes everything you buy with a card more expensive. Even the average credit card interest rate is hovering above 17 percent, which is quite high. The higher your credit card’s APR, and the less you pay toward your balance each month, the more credit card interest you ultimately pay.

When is credit card interest charged?

Interest only kicks in when you don’t pay your statement balance in full by your due date.

At the end of every billing cycle, you’ll get a statement that tells you exactly how much you owe. At that point, your purchases are still interest-free. But if you don’t pay that amount in full by the due date on your statement, the unpaid balance carries over to the next billing cycle, becoming a revolving balance. Then interest is applied to your purchases.

Credit Card
Key takeaway
Your statement will include a minimum payment amount. Paying that will help you avoid late fees, but not interest. The only way to avoid interest is to pay your entire statement balance.

Credit card interest accrues daily, and the total amount of interest you owe will be added to your bill at the end of each billing cycle.

Types of credit card interest

There are different types of interest, and your issuer will likely charge different interest rates for various transactions. Most of the interest rates listed below are variable interest rates, meaning they increase or decrease based on market conditions. While it’s possible to find fixed interest rates for credit cards, they are exceedingly rare and are more commonly found with mortgages and personal loans.

Here are different credit card interest rates to know:

  • Purchase APR: This rate applies to purchases made with a credit card.
  • Balance transfer APR: This rate applies to balances transferred from other credit cards and loans.
  • Introductory APR: This rate is temporary and is not offered by all lenders, but cardholders who receive an introductory APR often get 0 percent interest on purchases or balance transfers for up to 21 months.
  • Cash advance APR: This rate applies when you use a credit card to get cash and is often higher than the purchase APR.
  • Penalty APR: This rate applies when you fail to pay your credit card bill by its due date and is typically higher than other interest rates your credit card charges.

What determines a credit card’s interest rate?

If a credit card has a variable APR, which they almost always do, the interest rate is most likely indexed to the prime rate. Credit card issuers use the prime rate to determine a range of APRs for their card products. From there, interest rates are assigned to you based on your credit score, credit history and other factors.

When you apply for a credit card, your issuer will do a hard credit inquiry (sometimes called a “hard pull”) into your credit report. This will allow it to see your credit score, payment history, number of credit accounts and other valuable information about the way you use credit.

Your issuer will use this information to determine whether to issue you a credit card, as well as what your credit limit and interest rates will be. People with higher credit scores usually qualify for lower interest rates. A good credit card interest rate is generally below the average, which is around 17 percent.

How to calculate credit card interest

If you want to know how much credit card interest you’ll pay based on how much you owe and your credit card’s interest rate, Bankrate’s minimum payment calculator can help.

If you’d rather do the math on your own, here’s how to calculate credit card interest:

  • Find your current APR and current balance on your monthly credit card statement.
  • Divide your credit card APR by 365 (the number of days in the year) to find your daily interest rate.
  • Multiply your balance by your daily interest rate.
  • Multiply your daily interest rate by the number of days in your billing cycle.

Let’s say you have an APR of 16.99 percent and you owe $2,000 on your card. When you divide this APR by 365, you get a daily interest rate of 0.046 percent. When you multiply your credit card balance of $2,000 by 0.00046, you get $0.92. That’s how much interest your lender charges, on your current balance, per day — and over the course of a 30-day billing cycle, you’ll end up with $27.60 in monthly interest charges.

Of course, these calculations only work if you don’t add to your credit card balance. If you make new purchases on your credit card before your billing cycle is over, you’ll need to do the math on your average balance over the course of the entire billing cycle — which could change things!

How to pay less in credit card interest

Making a purchase with a credit card has many benefits, especially if you are trying to build your credit or earn rewards — but interest charges could cost you a lot of money over the long term.

With that in mind, your best bet is to avoid interest charges or take steps to minimize their impact.

The strategies below can help you save money on credit card interest now and later in life:

  • Pay your credit card bill in full each month. Most credit cards offer a grace period that begins on the last day of your billing cycle and ends on your payment due date. If you pay off your statement balance before your grace period ends, you won’t be charged interest on those purchases. Most credit cards allow you to set up auto-pay so that you never miss a payment.
  • Pay your bill early. You don’t have to wait until your billing statement closes to make a payment. In fact, you can reduce interest charges on revolving balances by paying your credit card bill early and reducing your average daily balance throughout the month.
  • Sign up for a balance transfer card. Already have costly debt? Consider transferring your balance to a credit card that offers a 0 percent intro APR period. The best balance transfer credit cards offer up to 21 months of no interest before the regular APR kicks in.
  • Pick a credit card with a low APR. Be mindful of a card’s different interest rates before you apply. Look for cards that offer a lower than average interest rate, or even an 0 percent APR credit card that lets you avoid interest on purchases for a limited time.

The bottom line

There are many different types of credit card interest — purchase APR, balance transfer APR, penalty APR and so on. Understanding how credit card interest works and when it applies can help you save money and avoid credit card debt.

If you want to save money on credit card interest, look for a low-interest credit card and try to pay your bills in full each month. If you already have outstanding credit card balances, look for a balance transfer credit card that offers zero-interest introductory APR for a year or more. The more you know about how credit card interest works, the more you’ll be able to reap the benefits of credit card use without getting stuck with interest charges.

Written by
Nicole Dieker
Personal Finance Contributor
Nicole Dieker has been a full-time freelance writer since 2012—and a personal finance enthusiast since 2004, when she graduated from college and, looking for financial guidance, found a battered copy of Your Money or Your Life at the public library. In addition to writing for Bankrate, her work has appeared on CreditCards.com, Vox, Lifehacker, Popular Science, The Penny Hoarder, The Simple Dollar and NBC News. Dieker spent five years as writer and editor for The Billfold, a personal finance blog where people had honest conversations about money. Dieker also teaches writing, freelancing and publishing classes and works one-on-one with authors as a developmental editor and copyeditor.
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