How Does Credit Card Interest Work?

One of the many ways credit card issuers make money is by charging you interest when you carry a balance on your card.

In a twist absolutely everyone expected, credit card interest is not at all straightforward. Cue a “Home Alone”–style shocked face. The rate you’re advertised isn’t quite what’s used to actually charge you, and when you’re charged can significantly impact how much you owe. Oh, and interest rates can change pretty easily and frequently after you sign up for a card.

Strap in. Here’s everything you need to know about how credit card interest works.

How Does Credit Card Interest Work?

Credit card interest is the amount of money you’re charged on top of your credit card balance when you repay later than the due date for that balance.

Anytime you use your card to make a purchase, withdraw cash or transfer a balance from another card, you incur credit card debt, but you’re not automatically charged interest. You’ll get a monthly statement with the amount of debt you’re carrying and a due date for repayment, usually a month out. If you repay the debt balance by the due date, you won’t pay interest on it. For each day past the due date that you carry any balance, you’re charged interest at the unique rate you were offered in your card agreement.

An interest charge is effectively an addition to your card balance. The card issuer adds a percentage of your balance (the credit card’s interest rate) to your debt total each day, increasing the total you owe. As you pay down the balance (whether that’s all at once or in increments), the amount added in interest gets smaller, and you pay no interest on a $0 balance.

You’ll never owe interest on any charges you repay before the statement due date. But you do owe interest on any balance you carry past the due date, even if you make the minimum payment listed on your credit card bill. (The minimum payment gets you out of owing late fees, not interest.)

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