For decades, credit cards have played a prominent role in how Americans make purchases, pay medical bills, and even earn rewards. While they are convenient and can even offer perks – like cash back rewards – they do have a dark side. If cardholders aren’t careful, spending can get out of control. Many consumers have good intentions and plan to pay off the entire balance monthly, but life happens. And before they know it, the balance – and interest – take on a life of its own.

Look at this article as a brief guide on how credit card interest is accrued. Lending institutions and retailers must borrow the money that they lend to you. And since they must pay interest on those funds, you must pay interest on what you borrow. However, the good news is: you can take steps to avoid paying unnecessary interest charges.

Calculating credit card interest

Many Americans readily admit they weren’t superstar math students in school and believe converting percentages is way over their head. And most will also agree they never read the fine print when they received a credit card. In Simple terms:

Credit card interest is calculated as an Annual Percentage Rate (APR), which is a percentage of the amount you owe. The APR is calculated based on multiple factors, including your credit score, the type of credit card, the issuer, and current market rates. 

Most credit cards offer an interest-free grace period, usually between 21 and 25 days. In this case, you may pay off your balance in full without being charged any interest. However, the balance that you carry beyond the grace period will accrue interest. 

Credit card interest is typically calculated using the average daily balance method; it takes your balance at the end of each day during the billing cycle and calculates the average balance over the entire billing cycle. This number is then multiplied by the APR and divided by 365 to determine the daily interest charge. Finally, they add each day’s interest charges, which is the total amount of interest you owe.

For example, let's say you have a credit card with an APR of 18% and a balance of $1,000. If you carry this balance for an entire billing cycle of 30 days, your daily interest charge would be $0.49 ($1,000 x 0.18 / 365). Over the course of the month, you would owe $14.70 in interest charges ($0.49 x 30). Here’s another term that’s worthy of your attention: compounding interest. Each day’s interest charge is added to your balance. Thus, even if you don’t make another purchase, tomorrow’s balance is higher than yesterday’s because the issuer tacked on interest. This is what can cause the debt to accelerate quickly, unlike a simple interest loan.

How to avoid paying unnecessary credit card interest

A budget can be a powerful tool to keep you from charging more than you can comfortably pay off at the end of the month. We spoke with Symple Lending, a company that specializes in helping people overwhelmed with credit card debt pay off high compounding interest rate credit cards. According to their team, “If you are unable to pay the balance in full, you should focus on adding a little more than the minimum payment required. By paying more than the minimum, you can reduce the amount of interest owed and pay off your balance more quickly.”

Another way to avoid paying interest on credit cards is to take advantage of a 0% balance transfer offer. Many credit card issuers offer promotional rates of 0% for a certain time frame when you transfer a balance from another credit card. While this can be a great way to save money on interest, you should first doublecheck to see if they will charge a balance transfer fee, which may be 3% to 5% of the amount transferred and could put you in another tough spot in the long run.

It's also important to read the cardmember agreement to learn what the new interest rate will be when the introductory period ends. And while you are reading the fine print, be sure you understand if there are fees that you may be assessed, such as an annual fee.

Additionally, remember to monitor your credit card statements regularly, checking for any errors or unauthorized charges. If you notice questionable activity, report it to your credit card issuer immediately.

The Bottom Line

Once you dissect how credit card interest is added to your balance, you will be more knowledgeable about debt and better equipped to manage it. Symple Lending tells us that the power is in knowing the facts, and how the interest rate “game” is played. Utilizing this knowledge will help you in coming out on top of that “game”.

If despite your best efforts you are having trouble keeping current on your credit card payments, and the balances are on the rise, it is important to seek advice from a professional like the team at Symple Lending quickly, to avoid putting your financial future at risk any more than it has already been. Consolidating your credit cards with a personal loan can be a good way to get out from under mounting debt. No matter what path you take to address dealing with debt, it is important to speak with someone that can give you the facts, so you can make the best informed decision for your situation.