How Does Credit Card Interest Work? An Extensive Guide

Credit cards have a lot of perks to offer. They can boost your credit score, offer flexibility, and earn users various beneficial rewards. However, they also come with interest, which can be more detrimental than beneficial if misunderstood or improperly used.

So, how does credit card interest work and how can you lower it? Our guide has all the answers!

Let’s jump right in!

What Is Credit Card Interest?

Credit card interest is the fee you pay for using money lent by your credit card company. When you use a credit card, you’re essentially borrowing money that belongs to the credit card company and you’re obligated to pay it back later.

On the other hand, a purchase interest charge, otherwise known as a finance charge, is added to your credit card balance for purchases you haven’t paid in full. If you don’t pay the total amount due by the end of the billing cycle, you will be charged with purchase interest.

How are credit cards different from loans?

Credit cards are open lines of credit with revolving balances that reflect the card user’s spending habits. Users can spend as much money as they need, provided they stay under the credit card’s limit. Additionally, cardholders can pay back as much or little as they want but have to meet the credit card’s monthly minimum.

Contrastingly, loans give users a certain amount of cash, paid back in increments every month, usually with an interest charge. Personal loans are typically cheaper, offering lower interest rates than credit cards.

How often are credit card interest rates charged?

Users are only charged interest when they fail to pay the complete balance of the last billing cycle on their credit card. Check with your card issuer to see our card’s specific billing cycle dates. Most credit card companies charge interest rates once a month, in conjunction with their monthly billing cycle.

The three primary credit card interest rates are fixed, promotional, and variable.

Fixed interest rates

Fixed interest rates stay the same and can only change after the credit card company gives the cardholder a 45-day notice.
The credit card company can also change the interest charge rate if the promotional fixed-rate period ends, if the consumer finishes a debt management program, or if the consumer is more than sixty days behind on their credit card payment.

When changes happen, the consumer can accept the change or decide to forgo further card use. Fixed rates usually charge more than variable rates because the consumer has relative stability with the card.

Promotional interest rates

Promotional interest rates usually have an expiration date and can only be used for specific purchases or uses. Most of these cards have a twelve-month introductory rate period.

Many promotional interest rate cards offer cash bonuses to consumers who spend more than a certain amount of money within a set time limit. Others offer 0% interest for specific periods, usually 12 to 24 months, with an increased credit card interest applied immediately after the introductory period ends.

Variable interest rates

A variable interest rate, or an adjustable rate, is an interest rate that changes over time, as it depends on a benchmark interest rate or index that fluctuates periodically.

This benchmark rate is added to a margin that the credit card company determines. The company almost always selects a margin reflective of the card user’s credit score.

For instance, a consumer with excellent credit may have a margin of 0% to 5%. Meanwhile, a consumer with poor credit can expect to see a significantly higher margin, often somewhere between 23% and 31%.

This credit card interest charge rate can change at any time, and the card issuer does not have to inform the consumer about the change. That said, variable interest rates are usually cheaper than fixed interest rates.

Form of Credit card balance calculation

Where can you find a credit card’s interest rates?

You can find your credit card’s interest rate in your card’s terms and conditions, on your credit card’s monthly statement (paper or digital), or your credit card company’s website.

If you’re having difficulty finding your credit card’s interest rate, reach out to your issuer over the phone, by email, or by chat on their website.

How to Calculate Credit Card Interest

Most credit card rates are determined by a variable APR that is based on an index rate. On top of that is a margin determined by the credit card user’s credit score. The higher the consumer’s score, the lower and more favourable the margin (interest rate).

How are interest rates calculated?

Credit card interest is calculated by dividing your credit card’s APR by 365 (the days in the year).

Next, figure up your average daily balance for the month’s billing cycle. Add up your daily balance for every single day of the month, and then divide that number by however many days there were in that billing period. The number you get is your average daily balance.

Lastly, multiply your daily rate by your average daily balance. Take the result, and multiply it by the days of the billing period. This is the total interest you are charged for the month.

Some credit card issuers use compounding interest on unpaid balances, meaning you’ll pay additional interest on top of your standard interest charge.

Here is an example:

Suppose you have a credit card with a purchase APR of 12% and your balance is $3,000 at the end of the thirty-day billing period.
First, divide the APR by the number of days in the year.

0.12/365 = 0.00032877 daily periodic rate.

Then, multiply that by your average daily balance.

0.00032877 x $3,000 = $0.98

Finally, multiply that by how many days were in the billing cycle.

$0.98 x 30 = $29.59. You will be charged $29.58 in interest for the month’s billing cycle.

Is credit card interest billed monthly or yearly?

Interest is expressed as an annual rate, called an APR. The annual interest rate on a credit card is calculated daily but is billed every month.

Credit card interest is only charged if the cardholder carries a balance at the end of the billing cycle.

How to Avoid or Reduce Credit Card Interest

Have you been wondering how to avoid interest charges on a credit card? Read through our quick tips to find out.

Pay your credit card bill in full

As long as you pay the entire balance of your credit card’s accrued debt before the end of the billing cycle, you will not be charged interest.

Pay more than the minimum

Even if you’re unable to pay the entire balance, pay as much as you can to cover late fees and reduce the average daily balance. Although this won’t eliminate credit card interest, it will reduce it.

Make more than one payment per month

Multiple monthly payments reduce the average daily balance and, as a result, lower the interest charges. It doesn’t eliminate interest but instead reduces it.

Sign up for a credit card with a 0% introductory rate

Credit cards with 0% introductory rates charge no interest during the introductory period.

Make sure you know when this ends and ensure that you don’t have an outstanding balance when that date comes. Usually, when the introductory period ends, the new rate is significantly higher than most other credit card interest rates.

You might be interested: Best Secured Credit Cards in Canada

The Bottom Line

Credit card interest is the price you pay for the money you borrow from your credit card issuer each month.

As a credit card user, it is your responsibility to do your due diligence to understand your billing cycle dates, your APR, introductory periods, and what type of interest your credit card issuer offers.

Pay attention to the interest rates, and make sure that you understand when and how often your credit card company can change your interest rate.


What is a good interest rate on a credit card?

The best interest rate is 0% APR, though any percentage under 14% is typically considered good. People with excellent credit can expect to pay less than 10%, while those with bad credit may pay 20% or more in interest. 

How to lower credit card interest rates?

You may pay the balance in full to remove all interest charges, pay more often or more than the monthly minimum to reduce the interest rate, negotiate with the credit card company for a lower rate, or switch to a card with a 0% introductory APR. 

How does credit card interest work and when is it charged?

Interest is charged on a credit card at the end of the credit card’s monthly billing cycle. Check with your card issuer to see your card’s billing cycle dates. 


With an early start in journalism and years of work as a technical translator, Marija felt it was natural to blend the two. Passionate about news and research, she enjoys sifting through the data, researching new currents and the constant changes in our technologically and financially driven lives, as well as presenting the stats and facts to the readers so you don’t have to dig deep on your own.

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