We've put together a quick guide on what you need to know about credit card interest and how it works:

What is credit card interest?

Credit cards are lines of credit or a set amount of money you can borrow and repay as needed until you hit your credit limit. If you borrow money from the line of credit and do not pay it back by the due date, you will be charged interest, or a percentage of the money borrowed, as a penalty. The interest is generally set at an annual rate known as the annual percentage rate, or the APR.

Important credit card terms to know

  • Billing cycle: A credit card billing cycle is the period of time between credit card billings. During that time, any purchases, credits, and interest charges will be added to or subtracted from your balance.
  • Credit card statement: When the billing cycle ends, you’ll receive your credit card statement, which will list all the transactions that occurred during that billing cycle.
  • Payment due date: When your credit card is opened, you will be provided a payment due date or the last date to submit payment without a penalty. The payment due date is approximately 20 days after the end of the billing cycle.
  • Grace period: The time frame between the end of the billing cycle and the payment due date is known as the grace period.

Calculating Credit Card Interest Rates

To calculate your interest charge for a billing cycle, follow this formula:

Step 1: Divide your APR by the number of days in a year to get your daily periodic rate, or the amount of interest your credit card issuer charges during each day of the billing cycle.

Example: If your APR is 18.5%, you’ll divide it by 365 to get your daily periodic rate of 0.0005%. (0.185 / 365 = 0.0005)

Step 2: Multiply the daily periodic rate by your average daily balance, or the balance you carry during each day of your credit card’s billing cycle, to get your daily interest charge.

Example: If your average daily balance is $1,200, multiply this number by your daily periodic rate (0.0005% from the example above) to get a daily interest charge of $0.60. (0.0005 * 1,200 = 0.60)

Step 3: Multiply your daily interest charge by the number of days in your billing cycle to get the total interest charged for the billing cycle.

Example: If your billing cycle is 30 days, take your daily interest charge ($0.60 from the example above) and multiply it by 30 to get an interest charge of $18.. (0.60 * 30 = 18)

Avoid paying interest

Strive to pay your credit card balance before the grace period ends to avoid interest charges. Set yourself a reminder to pay your bill before it’s due, and you’ll never pay credit card interest again. Sweet!

Credit cards are a necessary part of life but can also be a gateway to debt. Before applying for that precious piece of plastic, brush up on your knowledge of how credit card interest works and how it affects you as a cardholder.

APR = Annual Percentage Rate.