How credit card interest works, and the minimum payment trap

From APR to a daily charge

A card's APR is a yearly rate, but interest is charged daily. The CFPB explains that issuers find the daily periodic rate by dividing the APR by 365 or 360, depending on the card. At 22.36%, that is 0.0613% a day on a 365-day year, or 0.0621% on a 360-day year. Your cardholder agreement says which one your issuer uses.

Most issuers apply that rate to the average daily balance. They add up the balance at the end of each day in the billing cycle, divide by the number of days, and multiply by the daily rate and the days in the cycle. Many include new purchases in each day's balance.

For example, take a 30-day cycle that starts with a $5,000 balance and a $1,000 payment that posts on day 21. The balance is $5,000 for 20 days and $4,000 for 10, so the average daily balance is $4,666.67. Interest for the cycle is $4,666.67 times 0.0613% times 30, or $85.76. Paying earlier in the cycle lowers the average and the interest.

How it compounds

When each day's interest is added to the balance, the next day's interest is charged on it too. The CFPB describes this as daily compounding. In the example above it raises the cycle's interest from $85.76 to $86.57. Over a full year with no payments, daily compounding at 22.36% works out to an effective rate of 25.05%. The difference is small month to month but grows on a balance carried for years.

The grace period

Most cards give a grace period on purchases: if you pay the full statement balance by the due date, new purchases are not charged interest. Issuers are not required to offer one. Separately, the CFPB notes that statements must be mailed or delivered at least 21 days before the payment is due. Carry any balance past the due date and you usually lose the grace period, so new purchases start charging interest the day they post. The CFPB notes you may lose it for the month you do not pay in full and the month after. Cash advances usually charge interest from the day you take them.

The current average APR

The Federal Reserve's G.19 release reported an average rate of 22.36% on credit card accounts that were charged interest in the third quarter of 2026. Counting every account, including people who pay in full, the average stated APR was 21.19%. Your own rate depends on your card and credit history and is printed on every statement.

The minimum payment trap

Most minimum payments shrink as the balance shrinks. A common formula in current cardholder agreements, used by several large issuers, is 1% of the balance plus that month's interest, with a dollar floor (often $25 to $41). On $5,000 at 22.36%, the first minimum is about $143.17: $93.17 of interest and only $50.00 toward the balance. Each month the payment falls a little, so the balance falls slowly.

$5,000 balance at 22.36% APR, no new charges. Interest accrues monthly at APR / 12, the simplifying assumption Regulation Z allows for statement estimates. The minimum is 1% of the balance plus interest with a $35 floor.

The minimum-only plan pays $7,811 of interest on a $5,000 balance. Holding the payment at $150, only about $7 more than the first minimum, saves $4,925 and over 12 years. The key is not letting the payment fall as the balance does.

The warning on your statement

The Credit CARD Act of 2009 requires a minimum payment warning on most credit card statements, set out in Regulation Z at 12 CFR 1026.7(b)(12). It must show:

• a bold heading warning that paying only the minimum means more interest and a longer payoff;
• how long minimum payments alone would take to repay the current balance (in months if under two years, otherwise in years) and their total cost;
• the monthly payment that would repay the balance in 36 months, its total cost, and how much that saves compared with minimum payments;
• a toll-free number for credit counseling.

The estimates assume no new charges. For the $5,000 example the warning would read roughly: about 17 years and $12,811 paying the minimum, or $192 a month for 36 months and $6,908 in total, a savings of $5,903. The 36-month lines can be left off when the minimum would already repay the balance in three years or less.

Balance transfer math

A balance transfer moves the debt to a card with a promotional rate, often 0%, for a set time. Current cardholder agreements charge a transfer fee of 3% to 5% of the amount moved (usually with a $5 minimum), and the fee is added to the new balance. Under Regulation Z a promotional rate generally must last at least six months; the length beyond that is set by each offer, and this example uses 18 months. When the promotion ends, whatever is left starts charging the card's regular APR.

$5,000 moved to a card at 0% for 18 months, then 22.36%, paying $250 a month. No new purchases on the card.

Even with a 5% fee the transfer saves about $1,035 here. To clear the whole balance before the promotion ends, the payment would need to be $286.11 a month at a 3% fee. Two cautions from the CFPB: new purchases on the transfer card may not get a grace period, and being more than 60 days late can let the issuer raise the rate on the transferred balance too. Our debt avalanche vs snowball guide covers paying several cards at once, and the debt payoff calculator compares a transfer or consolidation loan with your current plan.

Penalty APR basics

Many cards list a penalty APR in their pricing table, a higher rate that can apply after a late payment. Regulation Z (12 CFR 1026.55) limits how it can be used:

• The issuer generally must give 45 days' written notice before raising your rate, and the higher rate can apply only to transactions made more than 14 days after the notice, not to the existing balance.
• The existing balance can be repriced only if the issuer has not received your minimum payment within 60 days after its due date.
• If the rate goes up because of a 60-day delinquency, the issuer must lower the rate on the balance it raised once you make six consecutive minimum payments on time.
• During the first year after the account is opened, the issuer cannot raise the rate except in limited cases, such as a promotional rate ending, a variable rate following its index, or a 60-day delinquency.

A payment that is a few days late can still bring a late fee under your agreement, and it can cost you the grace period. Paying the full statement balance on time each month is the surest way to avoid interest on purchases.