How credit card interest works

Your card's annual percentage rate, or APR, is the yearly cost of carrying a balance. Each month, the card charges a slice of that rate on what you owe. Most issuers actually calculate interest daily, using your APR divided by 365, and add it up over the billing cycle. Dividing the APR by 12 gives a very close monthly estimate, and that is what we use here.

At 22% APR, the monthly rate is about 1.833%. On a $5,000 balance, that works out to $91.67 of interest in the first month. When you make a payment, that interest is covered first. Only the rest of your payment reduces the balance.

This is the single most important idea in paying off a card: the amount you pay above the monthly interest is what actually gets you out of debt. A $200 payment puts $108.33 toward the balance in month one. A $300 payment puts $208.33 toward it, almost twice as much, even though the payment is only 50% bigger.

Payoff time at different monthly payments

Here is how long a $5,000 balance at 22% APR takes to pay off, and how much interest you pay along the way, at five payment levels.

Look at the jump from $110 to $150. An extra $40 a month cuts almost four years off the payoff and saves more than $3,000 in interest. That happens because $110 is only a little above the first month's interest, so the balance barely moves at first. Once your payment is comfortably above the interest, each extra dollar makes a smaller but still meaningful difference.

The minimum payment trap

Card issuers set a minimum payment you must make each month. The exact formula depends on your card agreement, but a common approach is 1% of the balance plus that month's interest, with a floor of around $25 to $35 once the balance gets small.

Using that kind of formula on a $5,000 balance at 22% APR, the first minimum payment would be about $141.67. That sounds manageable, and it is supposed to. The catch is that the minimum shrinks as your balance shrinks, so you never build up speed.

1. First minimum payment$141.67
2. Time to pay off, paying only the minimum197 months
3. Total interest paid$7,673.08

That is more than 16 years, with more paid in interest than the original $5,000 balance. Compare it with simply paying a fixed $150 every month: 52 months and $2,798.09 in interest. The fixed payment starts out only a few dollars higher than the first minimum, yet it saves nearly $4,900 and more than 12 years.

What it takes to be debt-free by a set date

If you would rather pick a finish line, work backward to the payment you need. For $5,000 at 22% APR:

1. Paid off in 1 year (12 months)$467.97/mo
2. Paid off in 2 years (24 months)$259.39/mo
3. Paid off in 3 years (36 months)$190.95/mo

These come from the standard loan payment formula, where B is the balance, r is the monthly rate and n is the number of months: Payment = B × r ÷ (1 − (1 + r)⁻ⁿ). You do not need to do this by hand. The Credit Card Payoff Calculator has a "Pay off by a date" option that does it for you.

How much your APR matters

Your interest rate has a big effect on the total cost, even when the monthly payment stays the same. Here is the same $5,000 balance paid at $200 a month under different APRs:

Going from 29% to 15% saves more than $1,700 on the same payment. That is why lowering your rate, even for part of the payoff, can be worth the effort.

Three ways to pay less interest

1. A balance transfer card

Some cards offer a low or 0% introductory APR on balances you move over from another card. Most charge a transfer fee, often around 3% to 5% of the amount moved. With a 3% fee, moving $5,000 adds $150, for a new balance of $5,150. To clear that during an 18-month 0% period, you would need to pay about $286.11 a month. If any balance remains when the promotion ends, the regular APR applies to it, so plan your payments around the end date. Approval and terms depend on your credit.

2. A debt consolidation loan

A personal loan with a fixed rate replaces your card balance with a set monthly payment and a firm end date. For example, a $5,000 loan at 12% APR over 36 months costs about $166.07 a month and $978.58 in total interest. Paying the same balance off on a 22% card over 36 months takes $190.95 a month and $1,874.28 in interest. Check for origination fees, which some lenders subtract from the loan amount, and compare the full cost before you apply.

3. Lower your rate and stop the new charges

Calling your card issuer to ask for a lower APR costs nothing, and customers with a record of on-time payments sometimes get a reduction. At the same time, stop putting new purchases on the card while you pay it down. New charges quietly push your payoff date further away, even when you are paying more than the minimum.

A simple plan you can start this month

1. Find your real numbers. Check your statement for the exact balance and APR.
2. Pick a fixed payment you can keep. Choose an amount comfortably above the monthly interest, and keep paying it even as the minimum drops.
3. Set up automatic payments. Automating the fixed amount means you never miss a due date or slip back to the minimum.
4. Add windfalls. Put part of any tax refund, bonus or pay raise toward the balance.
5. Review your rate. If your APR is high, compare a balance transfer or consolidation loan with your current path.

Frequently asked questions

How we calculated these numbers

Every figure in this guide was calculated month by month: interest is found by applying the monthly rate (APR ÷ 12) to the balance, rounded to the cent, then the payment is subtracted. Minimum payment figures use 1% of the balance plus interest with a $35 floor, a common style of formula; your card's formula may differ. For more on your rights as a cardholder, see the Consumer Financial Protection Bureau's credit card resources.