How Credit Card Interest Compounds

Credit card interest is calculated daily using this formula: Balance × (APR ÷ 365) = Daily Interest. This daily interest is added to your balance each day, creating compound interest. A $2,000 balance at 20% APR costs ~$1.10/day in interest.

The Minimum Payment Trap

Minimum payments (typically 2% of balance) often cover mostly interest with little principal reduction. On a $10,000 balance at 20% APR, the minimum payment is ~$200, but $167 goes to interest and only $33 to principal. At this rate, it takes 238 months (20 years!) to pay off.

Statement Closing vs Due Date

Interest accrues from the statement closing date to the payment due date. If you can pay in full by the due date, you avoid interest entirely. Credit card companies offer a grace period (typically 21 days) on new purchases for customers without carrying balances.