How Does Credit Card Interest Work?

Staying out of credit card debt is not just about curbing your spending. It also has to do with understanding how credit card interest works — so you can pay as little of it as possible.

This guide breaks down how interest is calculated, the different types of credit card APR and the best strategies for not letting high-interest cards wreck your budget.

What Is Credit Card Interest?

When you use a line of credit like a credit card, you are essentially borrowing money from the credit issuer to make purchases. For that privilege, you agree to pay credit card interest on the amount borrowed.

Credit card interest is calculated based on the card’s annual percentage rate (APR) and the amount you owe. If you repay your card balance strategically, however, you can avoid paying credit card interest.¹

Types of Credit Card Interest

When you think about credit card interest, the regular APR for purchases likely comes to mind, but there are a few different types of APRs to be aware of as well.

First, you should understand that APR can be variable or fixed. The vast majority of credit cards have a variable APR, which means the rate can fluctuate periodically based on changes to the prime rate. A few cards may offer a fixed rate, which means rates will generally stay the same.²

There are also different rates applied within a credit card account depending on the type of transaction:²

• Regular purchase APR. This is the interest rate for purchases that you make.
• Balance transfer APR. If you decide to transfer an existing balance to a credit card, a separate APR will be charged on that balance. Oftentimes, cards offer a promotional period in which the balance transfer APR can be as low as 0%.
• Introductory APR. This refers to a period of time in which new cardholders pay a lower or 0% interest on purchases and/or balance transfers. Not all cards offer this, but those that do may offer it for a period of several months.³
• Cash advance APR. If you take out cash from your credit line, you will typically pay a higher APR on that amount.
• Penalty APR. Some cards will raise your APR to a higher penalty rate if you miss a payment or have a payment returned. This APR can last a few months or indefinitely, depending on the card.³

What Is the National Average Credit Card Interest Rate?

The national average credit card interest rate has fluctuated just below or above 20% since 2023.⁴

How Is Credit Card Interest Calculated?

Credit card interest calculation is complex, and it can vary by issuer.

In general, most card companies apply daily interest charges, called the daily periodic rate.¹ The rate is typically your APR divided by 365 or 360 (depending on the issuer).⁵

For instance, if your card APR is 20.99% and the issuer uses a 365-day calculation, your periodic daily rate would be 0.058% (the APR divided by 365). This rate will then be applied according to the method that is used by your card issuer.

Many cards will take your average daily balance for the billing period, multiply it by the daily periodic rate and then multiply that by the number of days in the billing period to get your total interest owed.⁶

Example

So, if your average daily balance was $237 and there were 30 days in the period, the formula would be: 0.058% (periodic daily rate) x $237 (average daily balance) x 30 (number of days in the billing cycle) = $4.12 interest charged for that billing period.

When Does Credit Card Interest Begin to Accrue?

When credit card interest accrues will depend on if and when you make a full payment of your balance. In most cases, credit cards offer a grace period so that if you pay your full statement balance by the due date, no interest will be charged. However, if you make only a partial payment, you’ll lose the grace period.³

Once the grace period is no longer in effect, interest will begin accruing from your billing date and each day going forward until your full balance is paid off.⁷

Example

Say your credit card balance is $100 and the due date is July 25. If you make a payment of $50 by the due date, then starting on July 26, interest will begin to accrue on the remaining $50 balance.

Keep in mind that most credit issuers use daily compound interest in their calculations, so even if you don't make any other purchases, your daily balance will increase slightly each day.³

Can Your Credit Card Interest Rate Change?

Credit card interest rates change for several reasons, but it can depend on the type of APR you have. For accounts that have a variable rate, you can expect your APR to change according to outside economic conditions, namely the prime rate.² This is why credit card interest rates tend to go up when the Federal Reserve raises the federal funds rate, and they may go down when there is a federal rate cut.⁸

For fixed-rate accounts, which are less common, your rate will remain fixed for at least one year. If the issuer does wish to change it after that, they are required to notify you at least 45 days in advance.²

The other way your interest rate could change is based on your account activity. If you miss payments, for instance, the card issuer might increase your APR (sometimes called a penalty APR). On the other hand, you could request that an issuer lower your APR. If you have been responsible with your account, they may approve that request.

How to Avoid Credit Card Interest

Interest charges can increase your debt burden and make it more challenging to pay off your bill if you are carrying a large balance. With some pre-planning and smart budgeting, however, it is possible to use credit cards without paying any interest at all, or you can minimize the amount of interest you pay. Here are tactics to try:

• Pay your bill in full. For the vast majority of credit cards, as long as your statement balance is paid by the due date in full, no interest will be charged.¹
• Only spend what you can afford. Not spending beyond your means can help ensure that you’ll have the funds available to pay your credit card bill in full, thus avoiding interest charges.
• Transfer your balance to a 0% APR card. If you have an existing credit card balance that you’re struggling to pay off, you could consider taking advantage of a balance transfer credit card offer. Some cards offer new cardholders a 0% introductory APR on balance transfers for a set amount of time. This gives you several months to make principal-only payments. Note that many of these offers do include a balance transfer fee, but you can still come out ahead if you end up paying off the balance before the introductory period is over.⁹
• Be strategic about debt payoff. If you have more than one credit card balance, going with a debt payoff method that prioritizes paying down the one with the highest interest first can help reduce the overall interest you’ll pay.¹⁰
• Maintain good credit scores. Understanding how to best use credit and having a good credit score can help you qualify for the lower end of the APR range offered by credit cards. You may also be able to call and negotiate a lower APR if you’ve been a good customer for a period of time.¹¹
• Make payments before the due date, if possible. Paying early or making more than one payment per month can lower your average daily balance, which will also lower the amount of interest charged for that billing period.¹²

Managing Health and Wellness Costs With the CareCredit Credit Card

If you are looking for an option to help manage your health and wellness costs, consider financing with the CareCredit credit card.* Get the care you want or need with easy, flexible financing options that allow you to pay for out-of-pocket expenses over time. Use our Acceptance Locator to find a provider near you that accepts CareCredit. Continue your wellness journey by downloading the CareCredit Mobile App to manage your account, find a provider on the go and easily access the Well U blog for more great articles, podcasts and videos.

Your CareCredit credit card can be used in so many ways within the CareCredit network, including vision, dentistry, cosmetic, pet care, hearing, health systems, dermatology, pharmacy purchases and spa treatments. How will you invest in your health and wellness next?

Author Bio

Dawn Papandrea is a journalist with more than two decades of experience covering personal finance and consumer issues. She has written for leading financial publications and organizations, including U.S. News & World Report, Investopedia, Bankrate and others.