If you carry a balance on your credit card, you’re not alone — but do you know exactly how interest is calculated?
When you don’t pay your credit card balance in full, your purchases become far more expensive over time. Understanding how credit card interest works can help you see the true cost of carrying a balance and make smarter decisions with your credit.
The Grace Period
First, some basic terminology: a credit card is different from a charge card. Charge cards require you to pay the balance in full every month, which is why they don’t charge interest — you’re not allowed to carry a balance.
Most credit cards, however, come with a grace period, typically around 28 days. During this time, you can pay off your purchases in full without paying any interest. If you pay the entire statement balance by the due date, you only pay what you charged.
If you don’t pay the balance in full — or miss a payment altogether — interest begins accruing daily. Credit card interest is calculated using a daily rate, which is your annual percentage rate (APR) divided by 365. For example, a 19% APR equals a daily rate of about 0.052%.
While that daily percentage seems small, it compounds every single day. Each day, interest is charged not only on your original balance, but also on any previously accrued interest. This continues until the balance is fully paid off.
How Credit Card Interest Works: An Example
Here’s a simple example to show how quickly interest can add up.
You purchase furniture for $1,500 on your credit card. When the statement arrives, you choose to pay $100, leaving a balance of $1,400. Your card has a 19% APR, which accrues daily.
After just 30 days, you’ll have accrued $22.03 in interest, bringing your balance to $1,422.03. That’s only one month. If the balance remains unpaid, interest continues to compound daily.
If you continue paying $100 per month, it would take approximately 18 months to pay off the balance and cost about $219 in interest. That means your $1,500 furniture purchase ultimately costs $1,719.
Now consider making only the minimum payment. Many credit cards calculate the minimum as a percentage of the balance plus interest — often around 1% of the balance. With an additional $15 minimum payment charge, your first month’s payment could total $37.03, while barely reducing the principal.
Only Charge What You Can Pay Off
Understanding how credit card interest works highlights why it’s so important to charge only what you can realistically pay off. Credit cards can be helpful in emergencies, but balances should be paid down as quickly as possible — ideally more than the minimum payment.
Relying on minimum payments can trap you in debt for years and cost you hundreds or even thousands of dollars in interest. If you already carry credit card debt, you may want to explore options like debt consolidation or transferring balances to a 0% APR credit card.
The best strategy is simple: pay your balance in full whenever possible, reduce existing balances aggressively, and avoid using credit when it isn’t necessary.