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How Does Credit Card Interest Work? Understanding APR

Key Takeaways
  • Credit card interest is the price you pay the credit card company for borrowing money.
  • If you pay your full bill before the due date, you won’t accrue interest charges.
  • Credit card interest is calculated by multiplying your card’s average daily balance by your daily periodic rate.
  • Sometimes you can get a lower interest rate simply by calling your credit card company and asking.

Credit cards can be valuable tools, and that’s true whether you want a convenient way to make purchases, you want to earn rewards on spending or both. Another major benefit of credit cards is the fact that you don’t have to pay credit card interest if you don’t want to. If you pay your credit card’s statement balance after your billing cycle ends, you can take advantage of your card’s benefits without the added cost of interest charges.

However, you should still understand your credit card’s interest rate, as well as how credit card interest works over time. After all, you may run into a scenario where you need to use credit to cover surprise expenses you have to pay down over time. Other times, you may wind up running short on your full payment and have to carry a balance for a while.

So, how does credit card interest work? This guide will answer this important question while providing examples and showing you how you can pay less interest over time. If your goal is using credit to your advantage without paying exorbitant interest charges, read on to learn more.

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What is credit card interest?

According to the Federal Trade Commission (FTC), credit card interest is “what you pay for using someone else’s money.”

In other words, credit card interest is a charge that comes into play when you use your credit card as a short-term loan, then take some time to pay the credit card company for your purchases.

Credit card interest is typically displayed as an annual percentage rate, or APR. When it comes to credit cards, the APR and the interest rate are typically the same.

Where a credit card with a low APR charges you less interest over time, credit cards with a high APR will charge you more interest when you carry a balance. If your goal is reducing the financial impact of credit card interest, you should be find a credit card with a low interest rate or pay your bill each month so you avoid interest altogether.

How credit card interest works

If you pay your credit card bill during your card’s grace period (the time between the end of your billing cycle and your credit card’s due date), you won’t be assessed any interest charges.

However, credit card interest works as a daily rate that is calculated based on the balance you carry beyond each billing cycle. This daily rate is calculated by dividing your annual percentage rate (APR) by the number of days in the year (365), then multiplying your average daily balance by the daily rate. Once the daily interest charge is determined, this amount is added to your credit card bill each billing cycle.

Also note that credit card interest you accrue from carrying a balance may also be called residual interest.

How to calculate credit card interest

Understanding how credit card interest is calculated, and how factors like your average daily balance and your interest rate impact the amount you’re charged, can be crucial to your financial well being.

Credit card interest is particularly tricky to calculate by hand because your interest rate is done on a yearly basis, but the calculations are based on a daily/monthly basis.

Learning how much interest will cost you is often the first step to minimizing its impact.

In this section, we will walk you through how to calculate your credit card interest using our credit interest calculator and also show you how to calculate your credit card interest by hand.

First, let’s look at the credit card interest calculator.

Credit Card Interest Calculator

Estimated Interest Charge for this Billing Period
*This calculator is for sample purposes only and is not to be used as a financial planning tool. Card interest may be different when calculated by your credit card issuer based on individual policies and spending.

Steps to calculating your credit card interest charges by hand

To find out how much interest you might pay on your credit card, you should take steps to calculate the daily periodic rate. Here are the steps required to do just that, plus an example.

You can calculate your daily APR using the following calculation and these three steps:

  1. Find out your credit card’s current APR, as well as the average daily balance on your credit card.
  2. Divide your credit card’s APR by 365 (for the 365 days in the year) to find your daily periodic rate.
  3. Multiply your current credit card’s average daily balance by your daily periodic rate.

Here’s an example of how these steps might work in real life:

Let’s say you have a credit card balance of $1,000 for the entire month in question, and that your credit card interest rate is currently set at 15.99%. In this case, you would divide 15.99% by 365 to get a daily APR of 0.0438%.

From there, you would multiply your credit card balance of $1,000 by 0.00043, which would get you a daily periodic rate of $0.43. This means you would rack up 43 cents in interest for each day of your billing cycle you carry a balance.

If you wanted to figure out your monthly interest charges, you would multiply this amount by the number of days in your billing cycle, which is usually 30. In this case, you would incur a $12.90 interest charge for the month.

When is credit card interest charged?

Generally speaking, each credit card issuer charges interest on your balance when you don’t make a full payment by your credit card’s due date. If you owe $500 but you only make a minimum payment of $25, for example, the finance charge would apply to the $475 balance you carry from one month to the next.

With that being said, the majority of credit cards offer something called a grace period. This period of time is interest-free and lasts from the day your billing cycle ends until the day your credit card payment is due.

If you managed to pay your full credit card statement balance during the grace period, you wouldn’t pay any interest charges that month.

What determines a credit card’s interest rate?

Credit card interest rates are determined by an array of factors including the prime rate, market influences, your credit card issuer and your own creditworthiness and credit score. By and large, individuals with a good or excellent credit score tend to qualify for the lowest interest rates, yet those with fair credit or a poor credit score pay the highest interest rates overall.

According to the Consumer Financial Protection Bureau (CFPB), you may have the chance to ask the credit card issuer what your interest rate might be before you apply. However, they may not be able to provide this information until they have the full borrower information from your application.

What is a “good” credit card interest rate?

A “good” credit card APR can involve any rate that is below average. At the moment, the average credit card interest rate is slightly over 16%.

With that being said, some 0% APR credit cards and balance transfer credit cards offer zero interest to each eligible cardmember for a limited time. With these offers, you get the chance to skip interest payments on purchases, balance transfers or both for up to 21 months.

You can also find different types of low-interest credit cards from time to time, which can offer lower than average rates for the long haul. However, credit cards with the lowest rates and best terms typically only go to individuals with good or excellent credit.

How to avoid credit card interest

Avoiding credit card interest is a solid goal to have if you want to maximize the benefits of your card. After all, credit card interest makes everything you buy more expensive, and it can add up to huge sums over time.

If you wind up using your card to rack up a considerable amount of credit card debt, the finance charge from that debt can cost thousands of dollars over time. As a cardholder, you would be wise to skip the high-interest finance charge involved in using credit altogether. But, how can you do that exactly?

To avoid credit card interest or make sure it doesn’t accrue, consider these steps:

In addition to these steps, you should strive to choose a credit card with no annual fee or a fee you can justify based on the cardholder perks you receive.

How to lower your interest rate

If you do wind up borrowing with a credit card for the long haul, there are other steps you can take to get a lower APR.

These steps can help make repayment of your credit card debt easier to handle, and they can save you money along the way:

With all this being said, you may not have to care about your credit card’s interest rate if you never carry a balance. When you remain debt-free, you can choose cards based on other factors like credit rewards programs, cashback rates, day-to-day cardholder benefits and travel perks.

Repaying credit card debt — An example

If you have credit card debt and you’re focusing on repayment, you should think long and hard about how long you want to pay it off. By and large, the amount of time you spend as a cardmember in repayment will determine how much interest you pay on your purchases. And, if you take your sweet time to become debt-free, you could wind up flushing thousands of dollars down the drain.

Want to know how much interest you could pay with a high-interest credit card? Consider this example:

Let’s say you currently owe $11,000 on a credit card with a 19% APR, and that you want to get out of debt in a reasonable amount of time. However, other bills and living expenses prevent you from paying as much as you really want to on your debt, so you’re only making a minimum payment of $235 right now.

If you stayed on this path without using your card to rack up more credit card debt, it would take you 56 months to become debt-free. During that timeline, you would pay back the $11,000 original balance you owed plus $5,636.64 in interest charges.

Now let’s imagine you reworked your budget so you could double your minimum payment and pay $470 per month. In that case, you could become debt-free in 28 months and reduce your interest charges to $2,689.

This example shows the power of making more than the minimum payment on your card, but it also shows how damaging high-interest cards can be to your finances. If your goal is using credit cards for their perks and rewards, you should strive to avoid racking up credit card debt altogether.

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FAQ: How does credit card interest work?

Does your FICO score play in your credit card interest rate?

Your card issuer will consider an array of factors when determining your interest rate, and this includes your FICO score in most cases. Where a high FICO credit score can qualify you for a card with better rates and terms, a low credit score will do the opposite.

Which companies will give me a credit card?

Consider applying for credit cards from issuers like American Express, Chase, Citibank and Discover. Some cards also let you pre-qualified online without any impact to your credit score.

How can I find a low-fee credit card?

Low-fee credit cards are available for students and people with good or excellent credit. You may even be able to find a card with cashback and no annual fee.

Holly D. Johnson
Holly D. Johnson Finance Expert

Holly D. Johnson is an award-winning personal finance writer who covers topics like insurance, investing, credit and family finance. As a leading voice in the travel and loyalty space, Johnson has traveled with her family to more than 50 countries over the last decade.

The author has also written extensively on the power of household budgeting, and she even co-authored a book on the topic. Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love was originally published in 2017, and it teaches families how to use zero-sum budgeting to reach their financial goals. She is also the co-owner and founder of the family finance and travel website, ClubThrifty.com.

Johnson’s 10+ years of writing have focused on helping families make important financial decisions at each stage of their lives. The author also applies the financial principles she teaches to her own life, and she is currently on track to retire in her late 40’s with her partner. She currently lives in Central Indiana with her husband and children, and she is a regular contributor for Bankrate, CNN, Forbes, U.S. News and World Report Travel and many other notable publications.

* Opinions expressed here are those of the LA Times Compare Cards Team and have not been reviewed or approved by any advertiser or entities included within this content. See our editorial policy for more details.

All products or services are presented in this content without warranty. The information, including card details such as rates and fees, is accurate at the time of publish. Please visit each bank's website directly for the most current information.