Credit card interest: How it works and how to calculate it

Credit card interest is a fee charged if there’s an unpaid balance on your account. But if you pay off your credit card’s statement balance by the due date every month, you may not have to worry about interest.

If you find yourself carrying a balance, it may help to understand how credit card interest is calculated. Find out how interest works and a few ways you may be able to avoid or reduce paying interest charges.

What you’ll learn:

• Credit card interest is the cost of borrowing money, typically shown as an annual percentage rate (APR).

• Credit cards typically have a variable interest rate, and rates can vary based on the type of transaction.

• One reason you might be charged interest on a credit card is if the balance isn’t paid in full by the due date each billing cycle.

• Carrying high balances from month to month can result in higher interest charges and affect credit scores.

Credit card interest is the cost of borrowing money, according to the Consumer Financial Protection Bureau (CFPB). It’s typically shown as an APR.

The terms “interest” and “APR” are often used interchangeably because they’re typically the same for credit cards. But that’s not necessarily the case for all debt.

• Interest rate: The percentage that an issuer charges on a credit card’s balance. On most credit cards, you can avoid paying interest on new purchases by paying your balance in full by the payment due date every month.

• APR: A broader measure that can include interest plus other costs. This can include application fees, administrative fees, origination fees and more. 

This is why APR may be higher than the interest rate for some loans and credit lines.

Credit cards usually have variable interest rates. Here’s how variable rates and other types of interest rates work: 

• Variable-rate APRs: Can change over time based on an index, such as the prime rate, that lenders use to set their rates. Cardholder agreements will state how a variable credit card APR can change over time. 

• Fixed-rate APRs: Less common for credit cards. Despite the name, the rate can still change. But if your issuer changes the rate, they’re required to notify you beforehand. Fixed-rate APRs can increase due to late or missed credit card payments, resulting in a penalty APR.

• Penalty APRs: Might apply if you make late credit card payments or miss payments altogether. Penalty APRs typically aren’t applied during your credit card’s grace period. And federal law requires issuers to provide a 45-day notice before charging a penalty APR.

• Introductory APRs: A credit card’s introductory APR, or intro APR, is a type of promotional interest rate sometimes offered on new cards or balance transfers. That lower APR might apply to all new purchases or certain transactions. The rate must last at least six months unless the cardholder falls behind on a payment.

• Cash advance APRs: Compared to standard purchases, cash advances could trigger a higher interest rate. And the interest typically starts accruing as soon as you request the cash advance.

• Balance transfer APRs: With a balance transfer, the APR is typically applied to the balance you move from one card to another. Balance transfer cards could offer low or 0% promotional APRs. But there can be other costs to consider, such as balance transfer fees.

Generally, issuers charge interest when cardholders carry unpaid portions of their statement balances into the next billing cycle.

If you carry a balance from one billing cycle to the next, you may still owe interest even if you then pay the new balance in full. You can reduce the amount of interest your issuer charges by paying down more of your revolving balance and paying off your balance by the due date.

Calculating the APR on money you borrow can be a little complicated, especially with compound interest. The full explanation of how your issuer calculates interest will be in your card’s terms and conditions. Learn more about how to calculate APR on a credit

Here are some ways to avoid or pay less in interest charges:

Paying your balance in full by the due date every billing cycle can help you pay less in interest than if you carry over your balance month after month. But if you can’t pay your balance in full, the CFPB recommends paying as much as possible and making at least the minimum credit card payment.

You don’t have to wait until the end of the billing cycle to make a payment. Paying earlier or more than once a month may help reduce interest charges if you’re carrying a balance and not paying your full balance off by the due date each month. You might also consider setting up automatic payments to make sure you make your payments on time.

If you need to apply for credit, you might consider applying for a credit card with a 0% introductory APR. Just make sure you know when the introductory period ends. At that point, the APR will increase to the standard APR disclosed in the card’s terms.

Most credit cards provide a grace period between the end of your billing cycle and your payment due date. So paying off your balance during the grace period can help you avoid interest charges.

Still have questions about credit card interest? Take a look at the answers to these frequently asked questions for more information.

Knowing how credit card interest works can help you understand how much it might cost to carry a balance. You can also reduce or avoid interest charges by paying your statement balance in full and on time each billing cycle. 

If you’re new to credit or searching for your next credit card, Capital One can help: 

• Check out credit cards for building credit.

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