What is credit card interest?

How does credit card interest work? Credit cards offer convenience, security and flexibility, but understanding how credit card interest works is vital to getting the most out of them and avoiding spiralling debt. A popular financial tool, there were almost 60 million credit cards in circulation in the UK alone as recently as 2024. While they are undoubtedly useful if used properly, having a strong understanding of how credit card interest works can help you keep up with any repayments and maintain a good credit score.

What is credit card interest?

Credit card interest is the cost you incur if you don’t pay off the full amount of your debt by the due date. If you purchase an item for £500 on your credit card, but then can only pay off £400 of that when your next bill is due, then your credit card provider will charge you interest on the remaining £100. This is known as carrying a balance.

The actual amount of interest you’d be charged depends on a number of factors, including Annual Percentage Rate (APR). You can also accrue interest by taking out a cash advance (withdrawing cash from a credit card will be seen as a cash advance and incur up to 5% fee), or if you miss a payment by an extended period of time (usually 60 days).

How is credit card interest calculated?

Credit card interest works in complex ways, and getting a solid understanding of it is essential to keeping on top of your finances and staying out of spiralling debt. Let’s take a look at the various factors involved in working out how much you’ll pay in credit card interest every time your bill comes due.

APR (Annual Percentage Rate)

APR is the annual interest rate charged on your credit card balance. It’s usually expressed as a percentage, and can range from around 5% to as much as 30% and beyond. Generally, the lower your credit score, the higher the APR you’re likely to be offered by a credit card issuer. This is because a bad credit rating will see you perceived as high-risk by the lender.APR also includes any annual fees that you may be required to pay to own the card, so it is a useful shorthand way of comparing different credit cards to find which one is the best for you. 

Bear in mind that although card providers are required to show a “representative” APR when advertising a card, this means that as little as 51% of people who were accepted for the card were offered that specific APR. The APR you personally are offered may be different depending on your credit score and factors like your current employment status, age and whether you’re a homeowner.

Compound interest

Most credit cards will compound interest charges on a daily basis. In essence, the card provider will add interest each day based on your balance from the previous day, which gives you a total interest due each month. In the main, this compounding interest will be relatively minor over the course of a month, but it’s still worth bearing in mind especially over longer periods. 

Grace periods

Plenty of credit cards do offer a grace period after the billing cycle ends, in which you can pay off your balance in full without incurring any credit card interest. Make sure you check the full terms of your credit card agreement and have a solid understanding of when you need to pay.

Minimum payments

While lots of credit cards feature promotional offers like 0% interest for a set period of time, these usually require you to make a minimum monthly payment on the card. Failure to do so will likely see any introductory deals ended immediately, with interest triggered straight away. You may also get hit with a late payment fee. All of this affects your credit score, so if your credit card has a minimum payment amount then ensure you’re fully aware of how much and how often.

Tips for avoiding high credit card interest

Keeping your credit card interest payments as low as possible is a key way to stay on top of your finances. It’s not always easy, but here’s some tips to bear in mind if you have credit card debt:

• Pay your balance in full: The best way to avoid credit card interest stacking up is to pay your balance in full before the due date. This also goes a long way to improving your credit score, making you more attractive to lenders in the future and opening up more financial products later on in life.
  
  

• Pay more than the minimum: if you can’t pay off the full balance by the due date, try to at least pay more than the minimum payment amount. This will not only reduce the amount of interest you accrue, it will also prevent your credit rating from taking a hit.
  
  

• Look for 0% APR introductory offers: some credit cards offer 0% APR for an introductory period of 12 months or more. By transferring your existing balance to these cards you can greatly reduce the credit card interest you owe.
  
  

• Set up alerts and reminders: many credit card providers will offer reminders and alerts to let you know when your payment is due, but don’t stop there. Set up your own reminders, for example via a calendar app on your phone, to make sure you have the money available in good time to pay off your balance.

• Get a Curve Wallet Curve is a digital wallet with a Go Back in Time feature that lets you move old purchases from one card to another. So if you are unable to pay your full credit card balance one month, you can move old transactions onto another credit card to pay off the credit card without carrying a balance. This is a great financial safety net to have in your pocket when you need it. 

Understanding how credit card interest works

By getting a good understanding of the inner workings of credit card interest, you can stay out of a vicious cycle of high interest payments that lead to unmanageable debt. By paying your balance in full and considering low-interest cards, you can greatly reduce the amount of interest you pay. You can also add your credit card (or cards) to Curve as a way to manage all your finances in one place and give you a leg-up on optimising payments and reducing interest charges.