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What is accrued interest on credit cards?

Published May 10, 2023
4 min read

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Key Points About: Credit Card Accrued Interest

  1. If you don’t pay off your credit card balance in full, you may collect interest on your balance.

  2. Your annual percentage rate (APR) impacts the amount of interest you’ll pay on your credit card.

  3. You may avoid accrued interest if you pay off your credit card each month.

If you don’t pay off your credit card in full each month, you may face an interest charge on your unpaid balance. Interest is the cost you pay your credit card issuer for borrowing money, and accrued interest is the build-up of unpaid credit card interest overtime. 

The amount of accrued interest you pay comes from multiplying your unpaid balance (the principal amount owed) by your daily interest rate. Credit card issuers typically charge accrued interest when you do not pay off your balance by the payment due date. Understanding accrued interest is a big part of managing your credit card debt because any unpaid interest you have can impact your finances.

Did you know?

You can avoid or limit the interest you pay on a credit card if you get a card with a low or no interest introductory offer. It’s important to note that you may still be faced with regular interest charges after the intro period ends. Discover® offers several 0% introductory APR credit card offers.

See which card is right for you.

How does accrued interest work?

Your credit card company calculates your accrued interest by multiplying the unpaid balance by the daily interest rate. According to the Consumer Financial Protection Bureau, your daily interest rate  is your annual percentage rate (APR) divided by 365 days. If you do not pay off your statement balance by the due date, this interest is then added to the credit card balance, increasing your credit card debt.

What factors impact accrued interest?

Several factors can impact the amount of accrued interest you may pay on a credit card:

  • Annual percentage rate (APR): According to the Consumer Financial Protection Bureau, your credit card APR is the cost you pay for borrowing money represented as a yearly percentage. If you carry a balance from month-to-month on your credit card, you may face an interest charge based on your APR. A higher APR will typically result in higher accrued interest on the unpaid balance. 
  • Grace period: Many credit cards offer a grace period, during which no interest is accrued on new charges. Your grace period is the time between the end of a billing period and the date your payment is due and can be 21 days or more. However, the grace period does not apply if you already have an unpaid balance on your credit card. In that case, you will be charged the daily rate on your balance.
  • Cardmember’s payment habits: The cardmember’s payment habits can greatly impact the amount of accrued interest. If the cardmember always pays off the balance in full by the payment due date, they will not have to pay any accrued interest. However, if the cardmember makes only the minimum payment, the accrued interest will continue to build up on the unpaid balance, increasing the overall debt.
  • Length of debt: The longer you keep an unpaid balance on your credit card, the more accrued interest will build up over time. An unpaid balance over a long period may lead to a significant increase in the total amount owed (interest on interest).

How to avoid accrued interest

Although it is important to try to avoid paying accrued interest, it is equally important to know ways to manage interest if it builds up. Some useful tips for managing accrued interest include:

  1. Pay off your statement balance in full: If you only make the minimum monthly payment, you risk accruing interest on your unpaid balance. You should aim to pay off your statement balance by the due date every month. 
  2. Get a card with a lower interest rate: If you don’t typically pay off your card each month, you should consider shopping for a new card with a lower interest rate to use as your primary card. This can help reduce the amount of accrued interest you have to pay on your purchases.  
  3. Balance transfer: If you have a large balance on a credit card with a high interest rate, consider transferring the balance to a card with a lower interest rate or an intro period with 0% APR. A balance transfer credit card may help you save on interest payments and pay off your debt more quickly.
  4. Financial planning: Good financial planning can help you better manage your expenses and avoid accrued interest. Create a budget, and monitor your expenses, and try to make a larger monthly payment even if you can’t pay off your statement balance in full. A debt repayment plan can help you keep your finances under control and reduce interest expenses.

An understanding of how accrued interest works is important to help you manage your finances and avoid getting into too much credit card debt. It’s important that you monitor your credit card statements regularly, review your interest rate, and make on-time credit card payments to minimize the impact of accrued interest. Good financial habits will help you take control of your credit card debt avoid excess expense.  

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