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How Does Credit Card Interest Work?

Last Updated: January 23, 2024
5 min read

Key points about: interest charges on a credit card

  1. Credit card interest is a fee a card issuer charges if you carry a balance past your credit card bill due date.

  2. You may not be charged interest on purchases if you pay your statement balance in full by the due date and don't take a cash advance.

  3. Credit score is one factor used to calculate interest rates for credit cards.

If you use credit cards, you’ve likely encountered an interest charge on one or more of your monthly credit card statements. But how does interest on credit cards work? 

Credit card interest can be considered the cost of borrowing money—specifically, the fee your credit card issuer (or credit card company) charges you for carrying a balance after the billing period ends. 

Understanding a few facts about credit card interest can help you manage your borrowing and could even minimize your chance of being charged interest. Here’s what you need to know about credit cards and interest rates.

What's your credit card interest rate?

Your credit card transactions are subject to an interest rate, also called your annual percentage rate (APR). Most credit card issuers charge a variable APR that can fluctuate, with the ability to increase or decrease over time. While your APR is an annual rate, some credit card issuers compound interest daily and use your APR to calculate your daily rate.

Your credit issuer usually determines the interest rate you'll receive when you apply for a credit card. According to Experian®, credit card interest rates are influenced by factors like your credit report, credit score, and the type of card you apply for. It’s good practice to review your credit score periodically to ensure accuracy and to prepare for the future.

How is credit card interest calculated?

Credit card charges are subject to daily interest if you carry a credit card balance past your monthly payment due date or take out a cash advance. Daily credit card interest could also accrue on a balance transfer credit card offer, so review the terms and conditions before you apply.  

Let's look at how card issuers calculate credit card interest.

At the end of each day, your credit card issuer multiplies your outstanding balance by your daily rate to generate your daily interest charge. Those credit card interest charges get added to your credit card balance the next day through a process called compounding. To determine how much interest you’ll pay on your balance each day, you can convert your APR to a daily percentage rate by dividing your APR by 365 (days in a year). 

For example:

If your credit card APR is 15%, your daily rate is 0.041096%.  Let’s say you carry a $1,000 balance from your previous billing cycle (or billing period); you can multiply that balance by your daily rate to arrive at the daily interest you’ll pay for the first day. In this case, your daily charge would bring your next day’s balance to $1,000.41 (plus any additional purchases and minus any new credits or payments). This process occurs each day until the end of your monthly billing cycle. So, if you made no other purchases or payments that month, your beginning $1,000 balance would become $1,013 on the last day of your billing cycle.

You can use the Discover credit card interest calculator to find the total you’d pay in interest based on your balance, interest rate, and monthly minimum payment. You can also see how adjusting your monthly payments could shorten your payoff time.

When does interest start to accrue on a credit card?

The day interest starts to accrue on your credit card transactions depends on a few factors, including the type of transaction. 

By paying your balance in full every month, you could avoid being charged interest on credit cards or losing your grace period, according to the Consumer Financial Protection Bureau. A grace period is typically from the day a charge posts to the payment due date on your following credit card statement.

If you carry a portion of your statement balance into the next month, you could lose the grace period that kept you from incurring interest charges. Along with the balance you carried over, all new charges could begin accruing interest from the day they're posted to your account. In other words, any purchases you make during a billing cycle are subject to interest charges if you don’t pay them off by the payment due date on that month’s billing statement. Any interest you accrue appears on your following billing statement.

Unlike regular purchases, a cash advance (borrowing cash from your credit limit) can typically start accruing a higher interest the day it posts to your account, and a cash advance can cause you to lose your grace period on purchases since you'll likely receive an interest charge.

A balance transfer (transferring credit card debt from one card to another) may be subject to daily interest the day it posts, which could cause you to lose your grace period. However, some credit card companies offer a promotional 0% APR on balance transfers and purchases. So, if you pay your credit card debt (balance transfer and purchases) off before the promotional period ends, you won’t pay interest charges or lose your grace period. Remember that your promotional interest rate could return to the standard rate once the introductory period expires, and the standard rate may apply to any unpaid balance and future transactions.

Did you know?

If you might carry a balance from month to month, the best credit card for you could be a balance transfer card with a low interest rate after the introductory period ends or a lower interest rate than the other credit card options you may have available. Plus, a balance transfer card that offers rewards could be an added benefit. With the Discover it® balance transfer offer credit card, you can earn 5% cash back on everyday purchases at different places you shop each quarter, up to the quarterly maximum when you activate.

Can credit cards have more than one interest rate?

Credit cards can have multiple interest rates besides standard and promotional ones. A separate interest rate often applies to a cash advance, typically higher than your standard credit card interest rate. And in some cases, your balance transfer APR may differ from your purchase APR. A credit card company may impose a higher penalty APR if a cardmember fails to make their minimum monthly payment or pays late.

Knowing how interest works on credit cards can inform your borrowing decisions and help empower your financial future. To understand the interest rates you’ll pay, check the terms and conditions when applying for a new credit card or managing an existing one. 

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  • Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.