Credit card interest is what you are charged when you don’t pay your credit card bill in full each month. It works as a daily rate calculated by dividing your annual percentage rate by 365, and then multiplying your current balance by the daily rate. That amount is then added to your bill.

If you’re carrying a revolving balance month-to-month, you have likely noticed interest charges on your monthly card statement. Do you have questions about how these charges are calculated? Remembering just a few facts about credit card interest will empower you to make the best financial decisions for yourself and your family. Here’s what you need to know:

## What is My Credit Card Interest Rate?

Your credit card purchases are subject to a standard interest rate called the Annual Percentage Rate, or APR. This number will vary from card to card and person to person depending on factors such as credit scores. Your APR is expressed in terms of a year, but credit card companies use it to calculate charges over your monthly statement period. So just like “miles per hour” is a way of measuring speed over an hour, APR measures interest over the time period of a year. But in both cases, the measurement can still be used for longer or shorter time periods.

## How is Credit Card Interest Calculated?

To find out how much interest you’re paying on your balance each day, you can convert your APR to a daily percentage rate. To do so, divide your APR by 365, the number of days in a year. At the end of each day, the card issuer will multiply your current balance by the daily rate to come up with the daily interest charge. That charge is then added to your balance the next day, a process called compounding.

For example:

If your credit card has an APR of 15 percent, it will have a daily rate of .00041096 percent. Let’s say a cardholder has a balance of \$1,000 at the 15 percent APR standard interest rate. The next day, interest is added and the balance becomes \$1,000.41, plus any additional purchases and minus any new credits or payments. This process occurs each day until the end of the cardholder’s monthly statement cycle. So at the end of the month, the beginning \$1,000 balance becomes \$1013 when interest charges are applied at 15 percent APR.

## When Do You Pay Interest on a Credit Card?

Here’s a great secret about credit card interest: credit card companies usually grant you a grace period. If a grace period applies, the credit card issuer will not charge you interest on purchases if you pay your entire balance by the due date each month.

However, if a cardholder fails to pay the entire statement balance, or does not make the payment in time, the cardholder has forfeited his or her grace period, and the interest charges will typically appear on the next statement. But cardholders should always check their cardmember agreement for details specific to their account.

### Other Credit Card Interest Rate Facts to Keep in Mind:

• Separate interest rates and charges can apply to cardholder’s cash advance balance and balance transfer balances. Furthermore, many credit cards will impose a higher penalty interest rate when cardholders fail to make payments.
• Most credit card variable interest rates can change with the Prime Rate. The Prime Rate is an interest rate that is three percentage points above the federal funds rate, which is set by the Federal Reserve Bank. Because this interest rate can increase, cardholders should be careful not to incur more interest charges than they can comfortably pay each month.

Remembering these simple facts about credit card interest will empower you to make the best financial decisions for yourself and your family.  Use Discover’s credit card Interest calculator to estimate the interest and payoff time for any credit card.

Originally published February 27, 2015.

Updated April 26, 2021.

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