Credit cards make it easy to make purchases and, in many cases, rack up reward points. They can also provide a sense of security in that you can use them in an emergency. But do you ever consider the interest that these cards charge? It’s important that you do, particularly if you don’t always pay your cards off each month. After all, such charges can quickly add up.
Credit Card Interest
Credit card interest is the cost of borrowing money when you carry a balance beyond the card’s grace period. It’s typically expressed as an annual percentage rate (APR). The rate depends on the card and the cardholder’s creditworthiness.
As of March 2025, the average credit card APR for new card offers is 24.20%. For existing accounts, the average APR is 21.47%. Some cards carry a variable APR that fluctuates with the prime rate or other benchmark.
Cardholders typically have a grace period, usually between 21 and 25 days after the billing cycle ends. If you pay off the card by the due date, you might avoid interest charges. If you don’t, you’ll have an interest charge that rolls over into the next month.
If you carry a balance from month to month, interest is usually calculated daily based on the Daily Periodic Rate (DPR). The DPR is your APR divided by 365 (or 360 for some issuers). For example, a card with a 15.99% APR has a DPR of approximately 0.0438%.
Your Daily Periodic Rate (DPR) is what determines how quickly interest adds up. Even a fraction of a percent compounded daily can grow surprisingly fast.
Types of APRs You Might Encounter
Many credit cards have multiple APRs depending on how you use the card. Understanding these different types can help you make smarter financial decisions and avoid unexpected charges.
Purchase APR
This is the standard interest rate that applies when you carry a balance from regular purchases. If you don’t pay off your full balance each month, this is the rate you’ll likely be charged.
Cash Advance APR
Using your credit card to withdraw cash from an ATM or get cash at the bank might come with a higher APR, often significantly higher than your purchase rate. Cash advances typically don’t have a grace period, so interest starts accruing immediately.
Balance Transfer APR
This rate applies when you transfer debt from one credit card to another. Some cards offer promotional balance transfer APRs, such as 0% for a set period. But once the promotional window closes, the rate often jumps.
Introductory or Promotional APR
Some cards offer a low or 0% APR for a limited time after opening the account. These promotions can apply to purchases, balance transfers, or both. Once the intro period ends, the APR reverts to the regular rate.
If the card uses a deferred interest promotion (common in store cards), you could owe all accrued interest retroactively if the balance isn’t paid in full by the end of the promotional period. However, most regular 0% APR credit card promotions do not charge deferred interest.
Penalty APR
If you miss payments or violate your card’s terms, your issuer might apply a penalty APR. This is an increased rate that can be very high. This rate can apply indefinitely, making paying off your balance even more expensive.
Compounding Interest
If you have a card with a high APR, your credit card balance can quickly increase. Why? Because of compounding interest charges that occur each day.
Each day, interest is calculated based on the current balance, and the interest charges are added to your balance, increasing the amount on which the next day’s interest is calculated. The process occurs daily throughout the billing period, meaning that the interest you’re charged one day contributes to the balance on which interest is charged the following day, and on and on. At the end of the month, daily interest charges will be added up and become a finance charge.
In Summary
Allowing your credit card balance to get out of hand can put you in a situation in which you have a high card balance monthly. Paying your statement balance in full by the due date each month can help you avoid interest charges entirely.
