In a twist absolutely everyone expected, credit card interest is not at all straightforward.
Cue a Home Alonestyle shocked face.
Oh, and interest rates can change pretty easily and frequently after you sign up for a card.
Heres everything you better know about how credit card interest works.
How Does Credit Card Interest Work?
If you repay the debt balance by the due date, you wont pay interest on it.
An interest charge is effectively an addition to your card balance.
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Youll never owe interest on any charges you repay before the statement due date.
(The minimum payment gets you out of owing late fees, not interest.)
How Is Credit Card Interest Calculated?
Credit card interest is calculated based on your credit card balance and your interest rate and generally charged daily.
Youll always see your interest rate expressed as an annual percentage rate (APR).
APR is the daily periodic rate multiplied by 365 or the monthly periodic rate multiplied by 12.
Interest gets calculated using your balance on a given month or your average daily balance for a given month.
Heres an example:
Say your credit card APR is 23.5%.
Thats based on a daily periodic rate of 0.06437%.
Applied over 30 days in the cycle, thats an interest charge of $24 for the month.
When Is Credit Card Interest Charged?
Credit card interest is charged daily or monthly on any balance you carry on the card.
You dont pay interest if you have a $0 balance and repay any charges before the due date.
When credit card interest is charged is important because of compounding interest.
So youre charged interest on the charges you put on the cardplusthe interest you incur.
In simple terms: Interest on interest on interest it can add up quickly.
How much interest you pay can depend a lot on when interest compounds.
With daily compounding interest, youll be charged $24 based on an average daily balance of $1,250.
If you dont carry a balance, you wont be charged interest.
Youll also pay less in interest if you have a lower APR.
If you move credit cards to get a lower interest rate, find a card with abalance transferoption.
Your card agreement will list the rate for each punch in of balance.
Types of interest rates include:
Interest rates can be either fixed or variable.
Average interest for accounts assessed interest (those that carried a balance) was 18.43%.
Those averages have been steadily climbing over the past few years, as has the prime rate.
On a credit card, theres no real difference between interest rate and APR (annual percentage rate).
No Interest Til Almost 2027?
Balance Transfer = Credit Card Cheat Code
