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How Does Credit Card Interest Work?

Lyle Daly
Ashley Maready
By: Lyle Daly and Ashley Maready

Our Credit Cards Experts

Eric McWhinnie
Check IconFact Checked Eric McWhinnie
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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 typically 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 at that level 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 means the APR can fluctuate.

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 a 24.00% APR, the daily percentage rate would be 0.07%.

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 a 24.00% APR. The interest on the first day would be $1,000 multiplied by 0.07%, which is $0.70. On the next day, the interest charge would be $1,000.70 multiplied by 0.07%, 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, but you can also opt not to take them out).

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 the 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). If you owe a balance at the end of the 0% APR period, you will owe interest on it at the card's go-to APR.

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.

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.


  • Yes, by law your card issuer is required to inform you of the card's APR. You can also find it listed in your billing statement each month, or in your online credit card account details.

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

    • The prime rate
    • Creditworthiness
    • Type of credit card
  • Credit card interest rates vary and since they are variable, the average changes over time. As of this writing, the average is 28.15%.

Our Credit Cards Experts