How Credit Card Interest Is Calculated

Credit card interest is calculated on your revolving balance—the amount you owe at the end of each billing period. Unlike a fixed installment loan, the balance can change as you make purchases and payments. Most issuers use a daily or monthly periodic rate derived from your APR. Use the Credit Card Payoff Calculator to see how long it takes to pay off your balance at your current APR and payment.

How APR Becomes a Monthly Charge

Your card’s APR (annual percentage rate) is stated as a yearly rate. To get the charge for one month, issuers typically divide the APR by 12. For example, an 18% APR gives a monthly rate of 1.5%. Each month, interest is applied to the average daily balance or the balance at the start of the period, depending on the card agreement. That interest is added to your balance, and your payment is applied to the total. The portion of your payment above the new interest reduces the principal; the rest of the balance continues to accrue interest next month.

Why Minimum Payments Stretch Payoff

Minimum payments are often set so that you pay a small percentage of the balance plus that month’s interest. At a high APR, a large share of the minimum goes to interest and only a small amount to principal. As a result, paying only the minimum can extend payoff for many years and multiply the total interest you pay. Increasing your fixed monthly payment shortens the timeline and reduces total interest. The Credit Card Payoff Calculator shows exactly how many months it takes for a given balance, APR, and payment.

No New Purchases Assumption

Payoff calculations assume you stop charging and pay down the existing balance with a fixed amount each month. If you continue to add purchases, the balance can grow faster than your payments reduce it. For planning, use your current balance and a payment you can sustain. Read what is credit card APR for more on how the rate is disclosed and applied.

Practical Takeaway

Credit card interest compounds on your revolving balance. Knowing how APR translates to monthly charges helps you choose how much to pay each month. Use the Credit Card Payoff Calculator to test different payment amounts and see how much sooner you can be debt-free. For strategies to accelerate payoff, see how to pay off credit card debt faster.