Whether opening a credit card account for the first time or if you’re a longtime account holder, it’s important to understand exactly how your credit terms work. One important element of using a credit card is understanding how your balances accrue interest—and how to avoid it.
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No single credit card is the best option for every family, every purchase or every budget. We've picked the best credit cards in a way designed to be the most helpful to the widest variety of readers.
What Is Credit Card Interest?
Credit card interest is the fee you’re charged for borrowing money, which is what using your credit card to make a purchase is. If you don’t pay your balance in full by the end of your card’s billing cycle, the amount you owe will be charged interest until you pay back the card issuer in full. An interest rate is usually presented as a yearly rate called an APR or annual percentage rate. Despite this name, interest rates are often calculated daily and charged to you monthly.
What Are the Types of Credit Card Interest?
Fixed vs. Variable
There are two main categories of credit card interest rates: fixed and variable. Fixed interest rates stay relatively constant. A fixed rate may change, but typically the lender will notify you before the rate changes.
A variable interest rate is tied to an index interest rate. This is a benchmark—usually a trusted metric set by reputable establishments like the Wall Street Journal’s Prime Rate or U.S. Treasury (yield). Whichever benchmark the variable-rate APR is tied to, it will fluctuate over time with the benchmark index.
Purchase Rates
Purchase rates or purchase APRs are charged on purchases made with a card when those purchases are carried into a new billing period. This is the most common type of APR, found on almost all credit cards.
Balance Transfer Rates
Balance transfer APRs are charged to balances transferred from other accounts when a balance is carried. These may or may not be the same as a card’s purchase APR, so be careful to pay attention to the cardholder agreement—especially the Schumer box, or standardized format where all rates and fees are listed. Some of the best balance transfer cards offer nearly two years at 0% APR.
Cash Advance Rates
Cash advance APRs are charged on cash advances and are notoriously higher than purchase and balance transfer rates. We hardly ever recommend using a credit card for a cash advance, since in addition to higher rates, cash advance fees are usually quite high.
Penalty Rates
Some credit cards (we won’t recommend many of them) also charge a penalty APR in the event a cardholder doesn’t make minimum payments on time. These rates are typically quite high and we rarely recommend cards featuring penalty rates.
Promotional Rates
Some cards will offer a promotional or limited APR period. For example, a 0% introductory APR may be offered on purchases and/or balance transfers for a limited number of months to incentivize users to use the cards for large purchases or as a respite from high interest rates on carried balances with another card.
Standard APRs typically kick in immediately when the promotional period ends so be sure to understand how and when interest is charged and have a plan for paying down any charges before the promo offer expires.
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How Is Credit Card Interest Calculated?
Most credit card companies will calculate credit card interest daily based on the current balance on your card. To calculate this daily interest rate yourself, divide your APR by 365 and then multiply by your current balance. It is important to keep in mind that some companies may charge different interest rates depending on how the balance was incurred: by making purchases, by transferring balances or by making cash advances.
When Are You Charged Interest on a Credit Card?
If you have not paid off your balance by the due date each month, you’ll be charged interest on any unpaid balance remaining. If you allow your balance to roll over month to month you’re likely to accrue interest on a daily basis.
Most cards offer a grace period for purchases before charging interest, but once your balance begins to accrue interest, that interest will compound. This means each day the interest is re-calculated and added to your balance, then the new balance is used to calculate interest the next day.
Grace periods also usually end the day you carry a balance, meaning new purchases will also accrue interest beginning the day they’re made. “Earning back” your grace period usually means making on-time payments for at least two billing cycles in a row.
How Do You Avoid Interest on Credit Cards?
The best way to avoid paying interest on your credit card is to pay off the balance in full before the due date each month. If you already have a balance rolled over from last month, making several payments throughout the month to reduce the balance can help reduce the amount of compounded daily interest you’ll accrue throughout the billing period.
Find the Best Credit Cards for 2024
No single credit card is the best option for every family, every purchase or every budget. We've picked the best credit cards in a way designed to be the most helpful to the widest variety of readers.
Bottom Line
Staying on top of your credit card balance each month is the best way to avoid paying interest entirely. If you do carry a balance into the next month, do your best to pay it off quickly; making several smaller payments as soon as you can is better than waiting until you can pay it off all at once because interest accrues daily and a lower daily balance will minimize the amount of interest you’ll accrue overall.
