Checking | Auto Loans | Mortgage | HELOC | Personal Loans | Credit Cards | Membership

How does credit card interest work?

Credit cards have been around since the 1950s and are part of most everyone’s daily life. Yet, we often don’t stop to ask: what is credit card interest and how does APR work on credit cards?

Credit card interest is the amount charged on an unpaid balance determined by the Annual Percentage Rate (APR). Because interest is compounded daily, it's best to pay off your credit card balance as soon as you can to avoid interest charges that will be added to your monthly bill.
At Credit Union of Southern California (CU SoCal), we make getting a credit card easy.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our auto loans, home equity lines of credit, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
What is credit card interest? Read on to learn more.

 Get Started on Your Credit Card Today

What is credit and why is it important?

Credit is a central part of any loan application process, whether you are applying for a credit card, auto loan, a new mortgage, or a mortgage refinance. Some employers will even look at your credit score during the hiring process to gauge a potential employee’s trustworthiness and ability to manage finances.
A credit history and credit score are the primary factors lenders will look at and use to determine a borrower’s ability to repay a loan.
Having good credit means you’ll benefit from better interest rates, more buying power, and better loan terms. Those are the “rewards” for being a low risk to lenders.

What is credit card interest?

The Consumer Financial Protection Bureau describes credit card interest as the price you pay for borrowing money. For credit cards, the interest rates are typically stated as a yearly rate, and this is called the annual percentage rate (APR).

When is credit card interest charged?

Credit card interest is charged when there is a balance on the account, whether the balance is accrued through purchases, a cash advance, or a balance transfer.

Interest rate vs. APR: What's the difference?

Credit card interest rates are typically stated as a yearly rate. This is called the Annual Percentage Rate (APR), which can be fixed or variable. The APR is used to calculate your interest rate during each monthly payment cycle on accounts that carry a balance.

Types of credit card interest

Not all interest is credited equal, and each type effects how much you will owe on your monthly bill. Here are the different types of credit card interest to be aware of:
Variable rates. These rates vary, typically based on the “prime rate,” an economic index that credit card rates follow.
Fixed rates. A credit card with a fixed rate will remain as such, unless other specific situations occur, such as the end of the introductory rate. Read the fine print in the credit card agreement to know ahead of time if your fixed promotional or introductory rate can change to an adjustable rate. A fixed rate may change if a late payment is made, which could result in a “penalty APR” replacing your usual rate.
Purchase APR. This is the rate charged on all purchases.
Balance transfer APR. This is the rate charged on balance transfers from other cards. This may be a promotional rate that expires after a specific introductory period.
Introductory APR. Whether your card is a balance transfer card or a card with another type of promotion, you will have an introductory rate that, when it expires, could increase significantly.
Cash advance APR. This is the rate charged on cash advance (cash borrowed) amounts.
Penalty APR. When payments are made late you can lose your current interest rate, and be assigned a new penalty rate that is higher. This is why it’s so important to pay off your credit card entirely each month or make on-time payments if you need to carry a balance.

What determines your credit card interest rate?

As you can see from the above-mentioned types of credit card interest, there are many factors that can affect your credit card interest rate and interest charges on credit cards. Some of these factors are controlled by the creditor and others can be determined by the credit card holder.

How to calculate your credit card interest

There are four steps to calculating your credit card interest:
  1. Find your current credit card APR.
  2. Divide the credit card APR by 365 to get your daily rate.
  3. Multiply the card balance by the daily interest rate.
  4. Multiply the daily interest rate by number of days in your billing cycle.
For example:
Let’s say you have a $1,200 purchase transaction balance and a 0.20% APR.
Divide 20 by 365 = 0.0005479 percent daily rate.
Multiply 1,200 by 0.0005479 = 0.6574
Multiply 0.6574 by a 30-day billing cycle = $19.72 interest charged.

How to plan your credit card payments

Being proactive with your finances is always a good plan. This includes keeping track of when bill payments are due, in order to avoid paying finance charges. It’s easy for credit card debt to accrue, which gets costly due to high credit card interest rates.
Use this credit card payoff calculator to plan your credit card payments and eliminate your credit card debt.

How to manage your credit card interest charges

Here are the most effective ways to minimize or eliminate credit card interest:
Pay off credit card balance. Paying the entire balance each month, including interest, is the best way to avoid paying interest and late fees.
Pay bill early. Credit card interest is charged on a daily basis, which means that if you are carrying a balance making payments before the actual payment due date can save you money on interest. If you do not carry a balance, then you may choose to pay on the bill’s due date.
Use a balance transfer credit card. If you are not able to pay off your credit card balance in full each month, interest will be charged, and your balance could increase rapidly making it even more difficult to pay off this debt. Using a balance transfer credit card, such as the CU SoCal Topaz Visa credit card, you can transfer high-interest credit card debt to a special card with a low promotional interest rate. This will help you pay down debt quicker.

Choose a credit card with a low APR

The Consumer Financial Protection Bureau explains that the APR (annual percentage rate) is the standard way to compare how much loans cost. A credit card company must disclose the APR before you agree to the use the card. To calculate the APR, the interest rate and fees are compared to the amount you borrow and calculated over a one-year period. This allows you to compare the costs of a credit card to a six-month installment loan. It is also why APRs are often different from simple interest rates.

Here are some credit card tips and tricks everyone should know.

Is it possible to get charged interest without a balance?

Yes, it is possible to get charged interest even if you have not made new purchases. This happens if you carried a balance at some point during which interest accrued. Even if you paid the new balance in full, interest will be owed.

Apply for a CU SoCal Credit Card Today!

Whether you’re looking to get rewarded for the purchases you make every day, or simply looking for credit cards with low-interest rates, our Platinum Rewards Visa and Topaz Visa credit cards offer two unique experiences designed to fit your needs. And by the way, you CAN apply for both!

Why savvy consumers choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including car loans, mortgages, Home Equity Loans, HELOCs, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

Get Started on Your Credit Card Today

Help + Support


Co-Browsing Code

Building Better Lives

Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


562.698.8326 | 866 CU SoCal Se Habla Español