When Are You Charged Interest on a Credit Card?

It is so easy to use credit cards that many people charge without much thought. Then, suddenly, the card is maxed out and even paying minimum monthly payments doesn’t make a dent in the balance.

The biggest cost of a credit card is the interest rate tagged onto your spending when you don’t pay on time. It adds up quickly and over time, you end up paying much more than what you originally charged.

Credit card companies charge an interest fee at the end of the month, but knowing when interest is charged — usually daily — is a big step toward cutting the costs of your credit cards.

Yet many consumers let those balances go largely untouched not just for days, but for months and even years. Credit card balances in America are at $1.14 trillion, with an average interest rate of more than 22%. That means American consumers are paying billions in interest on unpaid balances. The delinquency rate – people who are not making payments on time or at all – is around 9%. Maybe you’re part of that number.

Once you know when interest is charged and how it’s calculated, you can make the changes needed to save money.

What is Credit Card Interest?

Credit card interest is what you are charged to use the card. It’s how the credit card issuer makes money. They give you an annual percentage rate (APR) that includes interest as well as fees. With credit cards, interest rate and APR are usually the same thing.

APRs differ depending on the type of credit card, the lender, promotional deals, and a variety of other factors. You also play a role in the APR on a card you apply for. Your credit history, how much credit you have, your income and your credit score are all factors. The stronger your credit and finances, the lower your APR will be.

During the life of your credit card your APR may increase if you miss payments, continually max out the card, or a promotional period ends.

How Does Credit Card Interest Work?

Interest begins to accrue when a card gets a balance. If the balance isn’t paid off at the end of the month, the cardholder is charged. That fee is added to the card’s balance.

APR can either be fixed, which means it doesn’t change with market rates, or variable, which means it fluctuates with an index rate, usually the prime rate that banks go by. Types of APR vary by lender, and even by different cards lenders offer.

In general, APRs for credit cards are:

• Purchase APR. Charged for anything you buy.
• Cash advance APR. Charged for cash advances, and may be higher than the purchase APR.
• Penalty APR. A rate increase, usually temporary, for late or missed payments, exceeding the credit limit, or other card contract violations.
• Promotional APRs. Offered as an incentive to apply for, or use a card, it’s lower than what would normally be offered, but for a limited time.
• Introductory APR. A type of promotional APR. It’s for new customers, usually with a time limit, and sometimes only for certain types of purchases.
• Balance transfer APR: Often as low as 0%, for balance transfers from other credit cards. It’s for a limited time, and then a higher rate is applied to the transferred balance, if it’s not paid off.

When Do Credit Cards Charge Interest?

Credit card interest is charged each billing cycle unless you don’t have a balance. The balance that’s carried over from one billing cycle to the next —28-31 days, depending on the card — is a revolving balance.

Before getting into the nuts and bolts, take a minute to see how your APR adds up. Call up your card statement online or find the paper copy. The top, or front page, will show what you will pay if you make minimum payments on your balance.

It may be an eye-opener.

For example, a $3,000 balance with a 22% APR, if you don’t use the card and make the minimum $85 monthly payment, will cost $4,873 and take four years and 10 months to pay off. That means you’ll pay $1,873 above what you charged. A balance of $6,000, with a minimum payment of $170, will double the extra cost, for a total of $9,746.

If the $3,000 balance has a 32% APR, with a minimum payment of $110, you’ll pay $5,431 in four years, and two months. That’s $2,431 more than the initial $3,000 you charged.

The information above is on the top, or front page, of your statement. You usually have to go all the way to the end to find your APR. Check it out and keep that number in mind as you read more about the impact it has on your wallet.

The interest you pay will show as a monthly charge on your statement. This doesn’t mean, though, that interest accrues once a month. Most cards charge an average daily balance, which is determined by dividing the APR by 365 (the number of days in the year). If you don’t pay your balance in full at the end of the month, you pay the amount of interest that accrued during the month, along with any fees.

That interest charge becomes part of your balance if you don’t pay the balance in full. So, interest is being charged on the interest. This is called compound interest. It adds up fast and this is why it becomes so expensive to carry a large balance.

Different Types of Interest Rates on Credit Cards

The credit card industry is competitive, which means that shopping around if you are looking to apply for a card will save you money. Carefully consider the types of interest rates offered, how you will use the card and whether you’ll carry a balance or not.

Variable Interest Rates

Most credit cards have variable-rate APRs, which means the rate changes as interest rates fluctuate. Your monthly interest charge isn’t consistent with a variable rate, which means it may be hard to predict your monthly minimum payment. Credit card companies are not required to notify cardholders of variable rate changes, so an increase can be a costly surprise. How a card’s variable rate works is spelled out on the cardholder agreement and monthly statement.

Fixed Interest Rates

A fixed APR does not change when market rates do. It’s usually higher than a variable rate. The credit card company can still change your APR for other reasons, but they must notify you first. Any purchases you make, or balance, before the change is charged at the previous rate. The benefit of a fixed rate is that a credit card’s APR (and monthly charges and bills) will be consistent, and you’ll be notified of a rate hike.

Promotional Interest Rates

Promotional interest rates are aimed at attracting consumers to a credit card or getting them to use their card more. There are a variety of types, but they all feature a low APR for a limited time. Introductory APRs, offered to new customers, usually last 12-21 months. They frequently only apply to specific purchases.

Balance transfer credit cards have a promotional rate, as low as 0%, on balances transferred from other cards. It lasts 6-21 months and applies to the transferred balance, not other purchases made during that period.

How to Calculate Credit Card Interest

You may want to get a jump on your monthly credit card bill, or just see what it’s costing you, by calculating your credit card interest. You’ll need your latest monthly statement and a calculator.

The steps to calculate your credit card interest are:

1. Check your latest credit card statement to find your monthly balance.
2. Find your APR, which is somewhere on your statement, though not always easy to locate.
3. Calculate the daily rate by dividing APR by 365 (days of the year) or 366 if it’s a leap year.
4. Determine your average daily balance by first determining the balance for each day of the billing cycle. If daily balances don’t appear on your statement, start with the billing cycle’s initial balance and add or subtract transactions to come up with each day’s total. Add up the daily balances, then divide by the number of days in the cycle.
5. Multiply the average daily balance by daily rate, then by the number of days in the billing cycle, to determine the monthly interest charge.

How to Avoid Paying Credit Card Interest

Credit cards don’t have to be expensive. There are many ways to avoid paying credit card interest. Now that you know when credit card interest is charged, how it accrues, as well as how much it costs, you have the tools to avoid paying it.

The biggest tip is understanding that you control your credit cards and how much you will pay. They don’t control you.

Tips to avoiding credit card interest:

• Pay off your balance as soon as the bill arrives every month.
• Make payments throughout the month to reduce the daily balance, and to ensure that by the end of the month, the balance will be zero.
• Set up automatic payments, so that you don’t have to remember to pay on time.
• If you have multiple cards, try to get the payment due dates as close to each other as possible, so you don’t have to remember to pay throughout the month.
• Get a balance transfer card with zero interest, transfer the balance, don’t use the card for anything else, and pay the balance off before the promotional period ends.
• Avoid using credit cards for expenses like groceries and utility bills. Cutting down the amount you add to a balance every month makes it easier to pay it off.

If you need motivation to stay on track, put a credit card statement that shows how much you’ll pay if you only make minimum payments on your refrigerator or bathroom mirror, any place you will see it every day. That figure will be a reminder of how much you will pay in the long run if you keep paying interest on your credit cards.

Bottom Line

Credit card interest can add up fast. You are now aware that:

• Interest is often charged on daily balances.
• The monthly interest fee is added to your balance, so if you don’t pay it off every month you are paying interest on interest. Compound interest adds up fast.
• There are different types of APRs, including promotional APRs, but it’s important to read the fine print to know the details of how they work.
• There are ways to avoid paying interest on credit cards, including paying off your balance every month.

If you have too much credit card debt to pay off your balances, or even pay them down or make monthly minimum payments, there’s help available. Credit counseling can be a big step toward learning how to pay down and pay off your credit card debt. A counselor at a nonprofit agency will review your finances and help you create a budget. They will also discuss debt repayment options including debt management plans, debt consolidation and debt settlement, and how they relate to your individual financial situation.

Remember, you have the power to bring your finances and debt under control, no matter how overwhelming it may seem.