How credit cards charge interest

Resources · Cards, loans and credit · 5 min read Starting out

Key points

• Credit card interest is charged on the balance you carry from one month to the next.
• The annual rate is split into a smaller monthly (or daily) rate.
• Small payments mostly cover interest, so the balance falls slowly.
• Paying more each month cuts both the time and the total interest.

The rate on your statement

Your statement shows an annual rate for credit card interest, often called the APR. You don’t get charged that whole rate in one hit. The card provider cuts it into smaller pieces and charges you a slice each month.

Easiest way to picture it? Divide the annual rate by 12. A card at 22% a year works out to about 1.83% a month.

Plenty of providers actually work interest out daily, using an average of your balance across the month. The answer ends up close to the monthly method, which is easier to follow, so that’s what the examples here use.

When credit card interest starts

Most cards give you an interest-free window on purchases if you pay the full statement balance by the due date. You’ll hear it called a grace period or an interest-free period.

Pay in full every month and you may never pay interest on purchases at all.

Pay only part of it, though, and things change. Interest gets charged on whatever’s left. And new purchases may start collecting interest straight away, because you often lose the interest-free window while you carry a balance.

Cash withdrawals and some other transactions usually get no interest-free window at all. The exact rules vary by card and by country, so read the terms and conditions. Yes, really.

A worked example

Here’s how the maths plays out. Assumptions:

• Balance: $3,000
• Annual rate: 22% (monthly rate = 22% ÷ 12)
• Payment: $150 a month, made after interest is added
• No new spending
• Interest compounds monthly

Month 1. Interest is $3,000 × 22% ÷ 12 = $55.00. The balance becomes $3,055.00. You pay $150, leaving $2,905.00.

So out of your first $150, only $95 actually reduced the debt. The other $55 just paid for the month’s borrowing.

Each month after. The same steps repeat on the new, slightly smaller balance. Interest shrinks a little each month, so more of each payment goes to the balance.

At $150 a month, the card is cleared in 26 months. The last payment is $21.44. Total interest: $771.44.

The same maths works in any currency.

How the payment size changes everything

Here’s the same $3,000 at 22%, with three different monthly payments:

Double the payment from $150 to $300 and you more than halve the time, and cut the interest by over $400. Drop to $90 and the time doubles while the interest more than doubles.

That’s the heart of card debt. Each month’s interest depends on the balance. So anything that brings the balance down sooner saves you money every month after.

Why minimum payments take so long

The minimum payment is often worked out from the balance, so it changes as the balance changes. The exact formula varies by provider and country.

Because it’s tied to the balance, the minimum shrinks as the balance shrinks. That feels like relief. It isn’t. It means the debt falls more and more slowly, and on a large balance, paying only the minimum can drag repayment out for many years. Paying only the minimum is a slow, expensive way out.

Some statements show how long the minimum alone would take. If yours does, look at it. Why minimum payments take so long goes into more detail.

Things that change what you pay

The rate is the first lever. A higher rate means a bigger interest charge on the same balance. The balance is the second, because interest is a percentage and a larger balance simply costs more each month.

Timing plays a part on cards that calculate daily. Paying earlier in the cycle can lower your average daily balance. New spending works against you, since adding purchases while you carry a balance grows the amount interest is charged on. And fees, like late fees and over-limit fees where they apply, get added to the balance and can collect interest too.

Some people focus on paying more than the minimum. Others put the card away while they clear it. What works depends on your budget and what you can keep up month after month.

If the repayments have become hard to cover, free debt help is available and confidential.

Common questions

How is credit card interest calculated?

The annual rate is split into a monthly or daily rate and charged on the balance you carry. A card at 22% a year works out to about 1.83% a month.

How do you avoid paying interest on a credit card?

On many cards, paying the full statement balance by the due date means no interest on purchases. Cash withdrawals usually don’t get an interest-free window.

Why is my credit card balance going down so slowly?

Small payments mostly cover that month’s interest, so only part of each payment reduces the balance. Pay more each month and you cut both the time and the total interest.

Try it

Put your own balance, rate and payment into the credit card payoff calculator to see your months and total interest. To see all your debts together, find your Freedom Date.

General information only, not financial advice. Your situation is your own.