Credit card interest calculator: how interest works

What is APR?

APR is the yearly price of borrowing, written as a percentage. A card at 22% APR charges roughly 22 for every 100 you owe for a full year.

Cards do not wait a year to charge it. The rate is cut into small pieces, monthly or daily, and each piece is added to your balance. Next month's interest is then counted on the new, larger balance. That is why a card debt grows faster than the rate suggests.

When do I pay no interest?

When you pay the whole statement balance by the due date. Most cards give you a few weeks between the statement and the due date, and purchases cost nothing in that time.

That free period usually disappears as soon as you carry a balance. From then on, new purchases start costing interest from the day you make them. Cash taken out with a card normally costs interest from the first day, plus a fee.

Why is the minimum payment a trap?

Because it is set to cover the interest and very little else. Most of what you pay goes to the card company, and the debt itself barely moves.

Here is 2,000 owed at 22% a year. The first month's interest is 36.67.

Monthly payment	Debt-free in	Interest paid
40	137 months	3,471.22
60	52 months	1,119.22
100	26 months	514.29
200	12 months	229.78

At 40 a month you pay for more than eleven years, and the interest is larger than the debt was. Twenty more a month cuts seven years off.

What happens if my payment is too small?

If you pay less than the month's interest, the balance goes up even though you are paying. On the 2,000 above, anything under 36.67 a month means the debt never ends.

This is the number to know for every debt you have: the monthly interest. Your payment has to be clearly above it before anything changes.

How do I pay less interest?

• Pay more than the minimum, even a little. The table above shows how much each step is worth.
• Pay early in the month. Interest is counted on the balance day by day, so a payment made sooner costs less than the same payment made later.
• Stop adding to it. A balance you are paying down and spending on at the same time does not shrink. Use cash or a debit card until it is gone.
• Start with the highest rate if you have several cards.
• Ask for a lower rate. Some companies agree, most of all when you have paid on time.

Whether to finish the card before you save is covered in should you pay off debt or save first.

Is a 0% offer worth it?

Sometimes. Moving a balance to a card that charges 0% for a set time can save real money, if you clear the balance before the time is up.

Check three things first: the fee for moving the balance, the rate that applies afterwards, and whether new purchases are also at 0%. Then divide the balance by the number of free months. If you cannot pay that amount each month, the offer only delays the problem.

Where does the payment come from in my budget?

From what is left after giving and bills, as a fixed line, not from what happens to remain at the end of the month. Decide the amount once, and send it on payday. How to find room for it is in the best way to split your salary.