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How Does Credit Card Interest Work?

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For all the benefits that credit cards offer, there are also risks to using them. One of the most common ways people get into trouble is via credit card interest. You can end up paying lots of money to your card issuer if you're not careful, which is why it's so important to understand how credit card interest works.

What is credit card interest?

Credit card interest is simply the cost of borrowing money with a credit card. If you don't pay off the full statement balance by the due date, then the card issuer can charge you interest on the unpaid amount.

What makes credit cards different from loans is that you can avoid interest if you use your card correctly -- you just need to pay the statement balance by the due date.

Most card issuers give you an interest-free grace period from the date they put together your billing statement until the payment due date. By understanding how credit cards work, you can use your card for purchases and pay them off without incurring any interest. This only applies when you pay in full, though. If you don't, you lose that grace period, and your card issuer can start charging you interest on new purchases immediately. You'll have to pay in full for two billing cycles in a row to get that grace period back.

What is APR?

APR stands for "annual percentage rate," and it's the total cost you pay per year for borrowing money. Let's say, for instance, you have a credit card with an APR of 20%. Your balance is $1,000, and it stays that way for the entire year. That balance would incur $200 -- 20% of that $1,000 -- in interest charges.

That said, most credit cards have variable APRs, which are APRs that can change.

It's only with credit cards that APR and interest rate mean the same thing. With other types of financing, such as loans, the interest rate refers specifically to the fee the lender charges for borrowing money. The APR is the total yearly cost of borrowing money, so it includes the interest rate and any additional fees. A mortgage has an interest rate, but it can also have an origination fee and closing costs -- those would be included in the APR, so the APR would be a bit higher than the interest rate.

How to find your credit card's APR

Your credit card's APR is listed in your billing statement each month. You can also find this information in your online credit card account.

Keep in mind that credit cards can have multiple APRs, as the rate can change depending on promotional offers, penalties, and transaction types. Here are the most common types of credit card APRs:

  • Purchase
  • Balance transfer
  • Cash advance
  • Promotional (a lower introductory rate, such as those offered by 0% intro APR cards)
  • Penalty (a higher APR that the card issuer can apply when your payment is late, usually by 60 days or longer, or for other violations of your cardholder agreement)

How is credit card interest calculated?

To calculate credit card interest, card issuers multiply the daily percentage rate by the balance. The daily percentage rate is the card's APR divided by 365. On a credit card with an 18.25% APR, the daily percentage rate would be 0.05%.

While calculation methods can vary by card issuer, the most common is multiplying the outstanding balance by the daily percentage rate each day, and then adding up the daily interest totals for the billing cycle.

Let's say you start with a $1,000 balance on a card with an 18.25% APR. The interest on the first day would be $1,000 multiplied by 0.05%, which is $0.50. On the next day, the interest charge would be $1,000.50 multiplied by 0.05%, and so on.

Our credit card interest calculator below can help you determine how much interest you may pay over time and when you can expect to pay off your debt.

Credit Card Interest Calculator
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How do card issuers determine interest rate?

Card issuers use a variety of factors to determine a card's interest rate, including:

  • The prime rate: This is the interest rate banks offer to borrowers with the best credit, and it's closely related to the benchmark interest rate set by the Federal Reserve.
  • Creditworthiness: Your credit, income, and other financial details will affect your card's interest rate if it has a variable APR. With better credit, you'll likely qualify for a rate on the lower end of the card's APR range. And among cards with fixed APRs, the cards intended for more creditworthy applicants tend to have lower APRs.
  • Type of credit card: A credit card's category and the benefits it offers can play a role in its interest rate. For example, card issuers may set higher interest rates on their top rewards credit cards.

Paying less credit card interest

There are a few ways to pay less in credit card interest:

Pay off your credit card every month

If you're able to pay your credit card off every month -- the entire amount owed, not just the minimum balance -- you'll avoid most interest payments (cash advances can be different).

Negotiate a lower interest rate

Sometimes, you can ask your credit card issuer for a lower interest rate. This is especially effective if you've held one credit card for a long time and you've consistently paid your bill on-time.

Get a card that offers a 0% intro APR for purchases

If you have a lot of expenses all at once, a 0% purchase intro APR card is a good short-term solution. These types of cards won't charge interest on purchases for several months (often 10 or more).

But be careful: Once they do start charging interest, however, they'll charge starting at the beginning of the card's history. If you have a 10-month 0% purchase intro APR card, you won't pay interest in month 9 or 10. But in month 11, the company will start charging interest on whatever you haven't paid off...as though they'd been charging since month 1.

In other words: This is a huge money saver, but it only works if you pay off the card completely before the 0% intro APR period ends.

0% intro APR credit cards

Below, we've listed three of our favorite 0% intro APR credit cards. For the full list, check out our guide: Best 0% Intro APR Credit Cards.

As of Aug. 11, 2022
Image for
Image for
Image for
Wells Fargo Reflect® Card Citi Simplicity® Card Chase Freedom Flex℠
Apply Now for Wells Fargo Reflect® Card

On Wells Fargo's Secure Website.

Apply Now for Citi Simplicity® Card

On Citi's Secure Website.

Apply Now for Chase Freedom Flex℠

On Chase's Secure Website.

Rates & Fees

Credit Rating Requirement:

Good/Excellent (670-850) Info Icon Circle with letter I in it.

Credit Rating Requirement:

Good/Excellent (670-850) Info Icon Circle with letter I in it.

Credit Rating Requirement:

Good/Excellent (670-850) Info Icon Circle with letter I in it.

Welcome Offer:

N/A

Welcome Offer:

N/A

Welcome Offer: Info Icon Circle with letter I in it.

$200

Rewards Program:

N/A

Rewards Program:

N/A

Rewards Program: Info Icon Circle with letter I in it.

1% - 5% cash back

Intro APR: Info Icon Circle with letter I in it.

Purchases: 0% intro APR, up to 21 months from account opening

Balance Transfers: 0% intro APR, up to 21 months from account opening on qualifying balance transfers

Intro APR:

Purchases: 0%, 12 months

Balance Transfers: 0%, 21 months

Intro APR:

Purchases: 0%, 15 months

Balance Transfers: 0%, 15 months

Regular APR:

15.24%-27.24% (variable)

Regular APR:

16.99% - 26.99% (Variable)

Regular APR:

16.49% - 25.24% Variable

Annual Fee:

$0

Annual Fee:

$0

Annual Fee:

$0

Highlights:

  • 0% intro APR for 18 months from account opening on purchases and qualifying balance transfers. Intro APR extension of up to 3 months with on-time minimum payments during the intro and extension periods. 15.24% to 27.24% variable APR thereafter; balance transfers made within 120 days qualify for the intro rate and fee of 3% then a BT fee of up to 5%, min $5
  • $0 Annual Fee
  • Get up to $600 of cell phone protection when you pay your monthly cell phone bill with your eligible Wells Fargo card (subject to a $25 deductible).
  • An easy way to earn cash back while you shop, dine or enjoy an experience simply by using your Wells Fargo credit card. Through My Wells Fargo Deals, you can get access to personalized deals from a variety of merchants.
  • Select “Apply Now” to learn more about the product features, terms and conditions

Highlights:

  • No Late Fees, No Penalty Rate, and No Annual Fee... Ever
  • 0% Intro APR for 21 months on balance transfers from date of first transfer and 0% Intro APR for 12 months on purchases from date of account opening. After that the variable APR will be 16.99% - 26.99%, based on your creditworthiness. Balance transfers must be completed within 4 months of account opening.
  • There is a balance transfer fee of either $5 or 5% of the amount of each transfer, whichever is greater.
  • Stay protected with Citi® Quick Lock and $0 liability on unauthorized charges

Highlights:

  • Earn a $200 Bonus after you spend $500 on purchases in your first 3 months from account opening.
  • 5% cash back on up to $1,500 in combined purchases in bonus categories each quarter you activate. Enjoy new 5% categories each quarter!
  • 5% cash back on travel purchased through Chase Ultimate Rewards®, our premier rewards program that lets you redeem rewards for cash back, travel, gift cards and more
  • 3% cash back on drugstore purchases and dining at restaurants, including takeout and eligible delivery service, and unlimited 1% cash back on all other purchases.
  • No minimum to redeem for cash back. You can choose to receive a statement credit or direct deposit into most U.S. checking and savings accounts. Cash Back rewards do not expire as long as your account is open!
  • 0% Intro APR for 15 months from account opening on purchases and balance transfers, then a variable APR of 16.49% - 25.24%.
  • No annual fee - You won't have to pay an annual fee for all the great features that come with your Freedom Flex℠ card
  • Keep tabs on your credit health - Chase Credit Journey helps you monitor your credit with free access to your latest score, real-time alerts, and more.
Apply Now for Wells Fargo Reflect® Card

On Wells Fargo's Secure Website.

Apply Now for Citi Simplicity® Card

On Citi's Secure Website.

Apply Now for Chase Freedom Flex℠

On Chase's Secure Website.

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Get a low interest credit card

If you're sure you'll carry a credit card balance from month to month, look into low interest credit cards. These cards charge less in interest than their competitors.

Many people can't pay off their credit card every month. If this is your situation, in addition to looking for ways to pay less in credit card interest, talk to a financial advisor. Your bank may also offer free financial advice, or might be able to point you to free financial services in your area.

Low interest credit cards

We've listed a few of our favorite low interest credit cards below. To see all the cards in our list, head to our guide: Best Low Interest Credit Cards.

As of Aug. 11, 2022
Image for
Image for
Image for
BankAmericard® credit card Citi® Diamond Preferred® Card Discover it® Balance Transfer
Apply Now for BankAmericard® credit card

On Bank of America's Secure Website.

Rates & Fees

Credit Rating Requirement:

Good/Excellent (670-850) Info Icon Circle with letter I in it.

Credit Rating Requirement:

Good/Excellent (670-850) Info Icon Circle with letter I in it.

Credit Rating Requirement:

Good/Excellent (670-850) Info Icon Circle with letter I in it.

Welcome Offer: Info Icon Circle with letter I in it.

$100 statement credit

Welcome Offer:

N/A

Welcome Offer: Info Icon Circle with letter I in it.

Cashback Match

Rewards Program:

N/A

Rewards Program:

N/A

Rewards Program: Info Icon Circle with letter I in it.

1% - 5% Cashback

Intro APR: Info Icon Circle with letter I in it.

Purchases: 0%, 18 billing cycles

Balance Transfers: 0%, 18 billing cycles

Intro APR:

Purchases: 0%, 12 months

Balance Transfers: 0%, 21 months

Intro APR:

Purchases: 0% Intro APR, 6 months

Balance Transfers: 0% Intro APR, 18 months

Regular APR:

15.24% - 25.24% Variable

Regular APR:

15.99% - 25.99% (Variable)

Regular APR:

13.49% - 24.49% Variable APR

Annual Fee:

$0

Annual Fee:

$0

Annual Fee:

$0

Highlights:

  • $100 statement credit online bonus after making at least $1,000 in purchases in the first 90 days of account opening.
  • 0% Introductory APR for 18 billing cycles for purchases, and for any balance transfers made in the first 60 days. After the intro APR offer ends, 15.24% - 25.24% Variable APR will apply. A 3% fee (min $10) applies to all balance transfers.
  • No annual fee.
  • No penalty APR. Paying late won't automatically raise your interest rate (APR). Other account pricing and terms apply.
  • Access your FICO® Score for free within Online Banking or your Mobile Banking app.
  • Contactless Cards - The security of a chip card, with the convenience of a tap.
  • This online only offer may not be available if you leave this page or if you visit a Bank of America financial center. You can take advantage of this offer when you apply now.

Highlights:

  • 0% Intro APR for 21 months on balance transfers from date of first transfer and 0% Intro APR for 12 months on purchases from date of account opening. After that the variable APR will be 15.99% - 25.99%, based on your creditworthiness. Balance transfers must be completed within 4 months of account opening.
  • There is a balance transfer fee of either $5 or 5% of the amount of each transfer, whichever is greater
  • Get free access to your FICO® Score online.
  • With Citi Entertainment®, get special access to purchase tickets to thousands of events, including concerts, sporting events, dining experiences and more.

Highlights:

  • INTRO OFFER: Unlimited Cashback Match – only from Discover. Discover will automatically match all the cash back you’ve earned at the end of your first year! There’s no minimum spending or maximum rewards. You could turn $150 cash back into $300.
  • Earn 5% cash back on everyday purchases at different places each quarter like Amazon.com, grocery stores, restaurants, gas stations and when you pay using PayPal, up to the quarterly maximum when you activate. Plus, earn unlimited 1% cash back on all other purchases – automatically.
  • NEW! Discover helps remove your personal information from select people-search websites. Activate by mobile app for free.
  • Every $1 you earn in cash back is $1 you can redeem.
  • No annual fee.
  • Click "Apply Now" to see terms and conditions.
Apply Now for BankAmericard® credit card

On Bank of America's Secure Website.

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FAQs

  • Credit card interest is simply the cost of borrowing money with a credit card. If you don't pay off the full statement balance by the due date, then the card issuer can charge you interest on the unpaid amount.

  • APR stands for "annual percentage rate," and it's the total cost you pay per year for borrowing money.

  • Your credit card's APR is listed in your billing statement each month. You can also find this information in your online credit card account.

  • To calculate credit card interest, card issuers multiply the daily percentage rate by the balance. The daily percentage rate is the card's APR divided by 365. On a credit card with an 18.25% APR, the daily percentage rate would be 0.05%.

  • Card issuers use a variety of factors to determine a card's interest rate, including:

    • The prime rate
    • Creditworthiness
    • Type of credit card

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