How Much Interest Will You Pay on Your Credit Card?
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Written by
Angela Mae
Interest on a credit card is essentially the cost of borrowing money. Depending on factors like your credit score and card type, the rate you get could be quite high. The higher the rate, the more you’ll have to pay each month you owe money on that card.
According to the Federal Reserve, 82% of U.S. adults have at least one credit card. Nearly half of these cardholders regularly carry a balance from month to month. This means they’re also likely being charged interest on that balance.
If you want a better understanding of how credit card interest works and how it affects your finances, you’re in the right place. Here’s how credit card interest is calculated, how to avoid paying high interest fees and how to make smarter financial decisions to save money.
What Is Credit Card Interest?
Most credit cards come with an interest rate, which is the cost of borrowing money from someone else — in this case, the card issuer. It’s expressed as a percentage and is based on the card’s annual percentage rate, or APR. Rates are usually variable, meaning yours could rise or fall over time.
Rates are generally capped at the state — and sometimes federal — level. The average credit card APR is 22.8%. But rates can be as high as 36%, depending on the credit card type, issuer and your personal credit score.
Credit card companies charge interest (and other fees) as a way to make money. If you don’t pay off your card each month, they’ll add interest charges to your unpaid balance. This increases the total amount owed. The longer you go without paying off your card, the more you’ll end up owing in interest.
How Is Credit Card Interest Calculated?
So, how is credit card interest calculated? Here’s a step-by-step process:
1. Change the Annual Rate to a Daily Rate
Credit cards typically have an APR (annual rate), but interest is calculated based on a daily rate.
To get the daily rate, take the APR and divide it by the number of days in the year. Say your APR is 22%. Your daily rate is 0.060% (22% / 365).
2. Calculate Your Average Daily Balance
Credit card companies charge interest based on the days you carry a balance during each billing period, starting with any unpaid balance from the previous month.
To get your average daily balance, add up all of your daily balances and divide the result by the number of days in the billing period.
3. Multiply the Two Amounts
To calculate how much interest you’re charged, multiply the daily rate by the average daily balance.
Say your daily rate is 0.060% and your average daily balance is $400. You’ll owe $7.20 in interest at the end of that billing cycle ($400 x 0.060% x 30).
Understanding the APR
Most credit cards have an interest rate that’s expressed as an annual percentage rate (APR). Your APR is significant because it — along with your daily balance — determines how much you pay in interest. The higher your credit card APR, the more you’ll pay in interest.
Credit card companies usually reserve the lowest APRs for borrowers with good credit or better. This is because good-credit individuals are less “risky” than those with poor or limited credit.
Your credit card may come with several types of APR, including:
- Purchase APR: This is the interest rate charged for everyday purchases made with your card. If you don’t pay off your full balance each month, you’ll have to pay interest.
- Balance transfer APR: If you transfer the balance of one credit card to another, you may have to pay a special balance transfer APR. On some credit cards, the balance transfer APR is the same as the purchase APR.
- Cash advance APR: If you withdraw money against your credit card limit, you’re requesting a cash advance. This will usually come with its own APR, which may be higher than your purchase APR.
- Penalty APR: This incurs when you make a late payment on your credit card. It’s generally higher than your purchase APR.
Some credit cards come with a promotional APR that gives you a lower rate — as low as 0% — for a specific period of time. This promotional APR may apply to balance transfers and regular purchases. Once the promotional period expires, the card switches over to its standard rate.
How Is Credit Card Interest Applied?
Credit card interest is usually calculated based on the daily periodic rate, or periodic interest rate. This is essentially the APR after it’s been converted to a daily rate. That is:
- The APR divided by the number of days in the year
Say, for example, your APR is 20%. Take 20% and divide it by 365. You’ll get 0.054%. That’s your daily periodic rate.
Credit card interest is usually compounded daily using your daily periodic rate and your average daily balance. Some companies will instead use a formula that lets the interest compound monthly. The more frequently your interest compounds, the more your interest charges will increase — and the more you’ll owe.
Credit Card Interest Calculation Formula
These are the basic steps for calculating interest on a credit card balance:
- Check your credit card statement to find out how many days are in the billing period.
- Find your annual percentage rate (APR).
- Convert your purchase APR into a daily periodic rate (ex. 20% APR / 365 days = 0.055%).
- Convert all other applicable APRs (promotional, cash advance, etc.) into a daily periodic rate.
- Determine the Balance Subject to Interest Rate or BSIR (this is essentially the average daily balance of your account).
- Multiply your average daily balance by the number of days in the billing cycle by the daily periodic rate to get the final amount of interest charged to your balance.
Put another way, the basic formula for calculating credit card interest is:
- BSIR x daily periodic rate x number of days in a billing period = total interest charged
Example of Credit Card Interest Calculation
Here’s an example of how to calculate interest on a credit card balance:
- Linda owes $3,000 on her credit card at the start of a 30-day billing cycle. She doesn’t pay off the balance, but nor does she charge more purchases on the card.
- Linda’s credit card has a 23% purchase APR. This breaks down to a 0.063% daily periodic rate.
- There are no other APRs beyond the purchase APR.
- Since there aren’t any balance changes throughout the month, Linda’s average daily balance would be $3,000 ($3,000*30 / 30).
- Linda would then multiply her average daily balance by her daily rate ($3,000 x 0.063%). The result is $1.89.
- She would then multiply $1.89 by the number of days in the billing cycle ($1.89 x 30).
- Her total interest charges that month would be $56.70.
How Do Credit Card Issuers Charge Interest?
You know how to calculate credit card interest. The next step is to determine how — and when — your card issuer applies that interest.
Credit card companies sometimes have what’s known as a “grace period.” This is typically a few days between the end of the most recent billing cycle and when your next credit card payment is due.
If you pay off your full balance during the grace period, you might not be charged additional interest. Otherwise, the card issuer will start applying interest to your balance at a daily (sometimes monthly) compounding rate.
Be aware that late payments can also impact your interest charges. If you don’t pay by the time the bill is due, you could end up facing a penalty APR. This is usually higher than your regular APR.
How to Avoid Paying Interest on Your Credit Card
Credit card interest can rack up and fast. Fortunately, there are ways to avoid getting charged:
- Pay in full: If you pay off the full balance during the grace period, you won’t get charged interest.
- Pay in advance: If you can pay the entire bill each month in advance, such as right after you use it to buy something, you can avoid getting charged interest altogether.
- Make extra payments: This won’t negate all interest charges, but it will cut down on how much you owe. If you have extra room in your budget, making even a small extra payment can save you money.
You can also pay more than the minimum to cut down on how much interest accrues. Here’s an example of what paying the minimum might look like:
| Principal balance / Amount due | $5,000 |
| Card APR | 22% |
| Minimum monthly payment | $200 |
| Total interest charges | $1,749.54 |
| Total amount paid | $6,749.54 |
| Time to pay off the card | 2 years and 10 months |
And here’s how paying more than the minimum might look:
| Principal balance / Amount due | $5,000 |
| Card APR | 22% |
| Minimum monthly payment | $200 |
| Extra amount paid | $100 |
| Total interest charges | $1,021.42 |
| Total amount paid | $6,021.42 |
| Time to pay off the card | 1 year and 9 months |
Key Factors That Affect Credit Card Interest
These are the main factors affecting credit card interest rates:
- Credit score: Borrowers with good credit or better (above 670) tend to get the best rates. You can improve your credit score by making on-time payments and keeping credit utilization down.
- Prime rate: Credit card rates may be influenced by the current market prime rate. Other types of credit, like loans, may be more affected.
- Promotional interest rate: If you have good credit, you could qualify for a low-interest credit card or one with a 0% promotional interest rate. This rate usually only lasts for 12 to 21 months. During this time, you won’t have to pay interest.
How to Lower Your Credit Card Interest Rate
If you feel like your credit card interest rate is too high, you may be able to lower it by:
1. Requesting a Lower Rate
Your card issuer might be willing to lower the rate if you contact them and ask. You’ll typically need to have an account in good standing for this to work. You may also need to have a better credit score than you did when you first applied for the card.
2. Improving Your Credit
The better your credit is, the lower your rate tends to be. If possible, work on improving your credit score. Then, you can request a lower rate or apply for a card with a better rate.
3. Switching to Another Card
Consider switching to a card with a lower APR or 0% introductory rate.
Frequently Asked Questions
How is credit card APR calculated?
Credit card interest is calculated based on the average daily rate (APR divided by the number of days in the year) and your average daily balance. Multiply these to get your total interest charged for that billing cycle.
What is the best way to avoid credit card interest?
Pay off your entire bill each month before interest is incurred. There’s usually a brief window, called a grace period, in which you can pay without getting charged interest.
How do credit card issuers calculate interest on cash advances?
Cash advances usually come with their own APR, separate from the regular or purchase APR. Interest starts accruing the day you request the cash advance.
Can credit card interest be waived?
Your credit card issuer may be willing to waive or lower your interest rate if you ask and have sound reasoning for doing so. If that doesn’t work and your credit is good, you may be able to get a low-interest credit card instead.
