How And When Is Credit Card Interest Charged?

If a credit card balance is not paid in full by a payment due date, credit card companies begin charging interest. Some banks will also charge a late fee and new purchases will incur interest immediately. In other words: Not paying your credit card bill in full and on time can be an expensive misstep with months of financial consequence.

How Do I Find Out the Interest Rate On My Credit Card?

The interest charged on your credit card is based on your card’s APR (annual percentage rate). This is specific to the card and can be set up in several ways:

• A fixed interest rate. If you have a fixed APR your interest rate will stay the same throughout the duration of your card membership. Only a small handful of credit cards on the market today offer fixed-rate interest.
• A variable interest rate. Most credit cards offer a variable rate of interest, which is a rate that can fluctuate based on the prime rate, which is the interest rate banks charge their most creditworthy corporate customers. Most credit card issuers add their own percentage on top of the prime rate to determine your credit card’s APR.
• A promotional interest rate. Some credit cards offer a low or 0% APR promotional rate as an incentive to apply. Typically the promotional rate will last from a few months up to nearly two years, after which the card’s standard variable rate will apply.

You can find your card’s APR in the cardmember agreement sent to you when you received your card or by calling the number on the back of your card and asking. When it comes to credit cards, APR and interest rates are interchangeable terms. For other types of loans, like mortgages and auto loans, the APR is typically the interest rate plus additional fees like taxes and insurance.

Read more: Best 0% APR Balance Transfer Cards

How Does Interest Work?

When you carry a balance from one billing cycle into the next, most credit cards charge interest using the average daily balance method. You can calculate your card’s daily interest rate by dividing the APR on your card by the 365 days in a year. Each day you carry a balance, if your card charges interest based on the average daily balance method, you’ll be charged based on the balance from the day before. The higher your card’s APR, the greater the interest you’ll accumulate each day.

For example, for a credit card with an APR of 17%, the rate per day would be .17/365, or 0.000466%. That daily rate interest is then multiplied by your balance that day. Since the average daily balance is compounded, each day the calculation is based on the day before.

So you have a balance on Day 1 of $10,000, on Day 2, your card would have a balance of $10,004.66, which is what you get when you multiply the balance of $10,000 by the daily rate of 0.000466. This means the balance of $10,004.66 on Day 2 would also be subject to the daily rate of 0.0466%, making your balance $10,009.32 on Day 3 and so on until the end of that month’s billing cycle.

However, if you pay your bill in full by the end of the month, you won’t have to pay any interest at all.

Is There a Grace Period For Card Payments?

Most credit card companies allow a grace period of at least 21 days, sometimes even 30 or longer, to pay off your account balance. The grace period starts the day your monthly statement closes, which is different from your card’s payment due date—usually later in the month. If you bank online you likely receive your statements as soon as they’re issued. If you receive paper statements, it may take a few days.

By law banks are obligated to provide a statement to customers at least 21 days before payment is due but are not necessarily required to provide a grace period.

Why Shouldn’t I Carry A Revolving Balance?

Carrying a balance on a card usually forfeits the grace period. This means if you don’t pay off a monthly balance in full by the due date, you will not have a grace period for paying off transactions the following month. You will be charged interest on the outstanding balance, as well as all transactions in the new statement period from the date of transaction. To regain your interest-free grace period, try to pay off all debt as quickly as possible. Depending on your cardholder agreement, it may take a couple months to “earn” the grace period back.

To avoid carrying balances into future statement periods, do not wait until exact due dates to pay off balances. If you cannot pay off your full balance by the end of the month, pay as much as you can before the deadline and try to keep paying as often as possible in whatever amounts you are able. Even if your next due date is not until later in the new statement month, if you carry an outstanding balance you will be accumulating interest every day of that month.

How Can I Avoid Or Pay Down Interest Charges?

You can usually prevent interest charges altogether on your credit card. The simplest way to never pay interest and maintain your monthly grace period between statements and payment due dates is to simply align your payments with all due dates, statement periods and policies associated with your credit card. Never carry any balance and you’ll avoid interest altogether.

Align Payment Due Dates

If you have multiple credit cards to pay off each month, it may be possible to request a change in your statement and payment due dates. Usually these are set up at the time of opening a new account. Unfortunately, this means that many card holders have to juggle more than one statement period and pay off different cards at different times in the month. For some people this may work to an advantage depending on what each card is used for and how they choose to fund each payment. For many of us, it may be simpler and easier to remember due dates if our banks align all our statement periods to conclude at the same time each month.

Pay On Time And In Full

While it may simplify things to set payments to the same due date for multiple cards, this does not mean you should then ignore each of your credit card balances the remainder of the month. Paying down your balance in small amounts throughout the month whenever possible can help reduce your overall debt and help keep you conscious of your spending and habits.

Paying on time or even ahead of time can work to your advantage for another reason: If you miss your payment due date and your balance is already reduced because you paid it down earlier in the month, you won’t carry as large a balance. Because your interest is a percentage of the balance on the card, the smaller the balance you carry over, the smaller the dollar amount of daily interest.

0% APR Cards

Many cards offer promotional periods with 0% APRs and some of those offer the ability to transfer an existing balance. Some people take advantage of this to buy time to pay off existing debt during the promotional period so as not to continue accruing interest. Balance transfers usually involve a fee of 3% to 5% of the amount being transferred. It pays to do the math to make sure that the amount you’ll pay in balance transfer fees is less than the interest you’re currently paying on your balance.

If for some reason you are unable to pay off a transferred balance by the end of the promotional rate, you will lose the 0% interest promotional rate and have to repay your debt at the standard rate. Make sure to confirm whether a card of this type offers the 0% APR introductory rate for balance transfers only, or whether it applies also to purchases made on the card during the promotional period. If it applies to balance transfers only, you should carefully read the terms regarding making purchases to fully understand how the card works.

Read more: Balance Transfer Calculator: How Much Can You Save With A Balance Transfer?

What If I Can’t Pay Off My Credit Card?

If you miss a payment date or are unable to pay off a credit card in full because of financial hardship, you should reach out to your bank directly. Especially if you have an excellent or good credit score already, or if this is the first time you’ve been unable to make a payment on time, your credit card company may be willing to work with you. Reach out before you miss a payment date if at all possible.

If you miss a payment due date but are able to pay off the full amount soon after, you can sometimes request a refund on the interest or late fee charge. If paying off the card looks to be a more drawn-out process, you can also apply for a personal loan with many card companies. Though, in this case, you will also want to keep in mind the interest rate of the loan and fully understand what will be different terms than those of your credit card.

Bottom Line

Compounding credit card interest rates mean that your balance can quickly become unmanageable. You can avoid being charged interest altogether by staying organized and within your budget so you can meet billing cycle payment deadlines. If you have to carry a balance, aim to pay off whatever you can as soon as you can. Other solutions involve contacting your lender and refinancing an account balance with a balance transfer card.