How does credit card interest work?

Credit card interest is a fee charged when there’s an unpaid balance on your account. If you pay off your credit card’s statement balance by the due date every month, you won’t have to pay interest on standard purchases.

What you’ll learn:

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

• 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.

• Credit cards typically have variable interest rates, which can change over time.

• Carrying high balances from month to month can result in higher interest charges.

Interest is a percentage charged on the money you borrow. The credit card issuer calculates interest daily using the card’s APRs. Interest also compounds over time, meaning it can accrue on top of interest charges you’ve already incurred.

Credit card issuers generally charge interest when a cardholder carries an unpaid balance from one billing cycle to the next. Interest keeps accruing on any unpaid balance until it’s completely paid down.

Credit cards usually have variable interest rates and often apply different APRs to transaction types, such as purchases, balance transfers and cash advances. 

Here’s how they work. 

• Variable-rate APRs: Can change 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 must notify you in advance. Fixed-rate APRs may increase due to late or missed credit card payments, triggering 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. Federal law requires issuers to provide 45 days’ notice before charging a penalty APR.

• Introductory APRs: A credit card’s introductory APR, or intro APR, is a promotional interest rate sometimes offered on new cards or for balance transfers. The lower APR may apply to all new purchases or to certain transactions. The rate typically remains in effect for 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. Interest typically begins 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.

In general, credit card issuers calculate credit card interest using your average daily balance. They divide your APR by 365 to get the daily interest rate. Then they multiply it by your balance and the number of days in the billing cycle.

The formula looks like this:

Average daily balance × Daily interest rate × Days in billing cycle

Learn more about how to calculate APR on a credit card.

To avoid paying interest or to pay less interest on credit cards, some key strategies include:

Paying your balance in full by the due date each billing cycle can help you pay less in interest than carrying your balance month after month. If you can’t pay your balance in full, the Consumer Financial Protection Bureau (CFPB) recommends paying as much as possible and at least the minimum credit card payment.

Paying earlier or more than once a month may help reduce interest charges if you carry a balance and don’t pay it 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. Once the introductory period ends, the APR can increase to the standard APR as disclosed in the card’s terms.

Most credit cards provide a grace period, when interest isn’t charged, between the end of your billing cycle and your payment due date. Paying your balance during the grace period can help you avoid interest charges.

Still have questions about credit card interest? Consider the answers to these frequently asked questions.

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.

• See if you’ll be approved with 100% certainty for a Capital One card with no risk to your credit scores.

• Earn cash back on every purchase, every day, with a cash back credit card.

• Monitor your credit score with CreditWise. It won’t hurt your credit, and it’s free.