How credit card interest really works
Card interest is quoted as a yearly rate, charged daily and billed monthly. Once you see how those three fit together, the minimum payment stops looking like a plan.
The rate is yearly, the charge is daily
Your card's APR (annual percentage rate) is divided by 365 to get a daily rate. Each day, that daily rate is applied to what you owe. A 24% APR works out to about 0.066% a day. That sounds tiny, but it runs every single day on the whole balance, and most cards add each day's interest to the balance, so tomorrow you pay interest on today's interest too.
The grace period is the most valuable feature on the card
If you pay the full statement balance by the due date, most cards charge no interest at all on new purchases. Carry even part of a balance over, and you usually lose that grace period: interest starts on new purchases from the day you make them, until you pay in full again.
Paying the statement balance in full each month makes a credit card interest-free. Paying anything less makes everything on it more expensive.
Why minimum payments take so long
Minimum payments are designed to be affordable, not to clear the debt. A large share of each payment goes to that month's interest, and only the rest reduces what you owe. Here is a $3,000 balance at 24% APR, with no new spending:
| Paying each month | Time to clear it | Interest paid |
|---|---|---|
| $90 | About 4 years 8 months | About $2,000 |
| $150 | About 2 years 2 months | About $870 |
Rounded, using monthly compounding for simplicity. Your card's exact figures will differ a little.
An extra $60 a month roughly halves the time and saves over $1,100. Your statement is required to show a similar comparison in its "minimum payment warning" box; it's worth reading.
What to do with this
- If you can pay in full every month, set up an automatic payment for the statement balance.
- If you can't yet, pick a fixed amount above the minimum and automate that instead, so progress doesn't depend on willpower.
- If you have more than one card, decide on an order to pay them off. Our guide to the two payoff methods explains the choice.
This guide is general personal finance education, not tax, legal or investment advice. Rules and figures can change, and your situation may differ.