Credit card interest example

Credit card companies charge you interest using something they call an Annual Percentage Rate (APR). However, the interest is often charged every day. Even worse, the interest charged on day 2 is the existing balance PLUS the interest you were charged on day 1 (and so on).

A simple way of saying it is that they charge interest on your interest. This is called compounding interest.

The good news is that if you pay off your balance in full every month, you won’t be charged ANY interest. So make that your goal…don’t pay interest!

But if you do carry a balance, know that credit card companies will charge you every day that you have that balance. So if you make a charge on day 10 of a billing period, know dang well that they are going to charge you interest on that for the 20 days left in that billing period!

The worst part is that they do all of this on the backend on “their books,” so you probably won’t even see how much interest you are charged until the end of the statement.

All of that being said, to minimize your credit card interest, pay down your credit card balance as soon as you have the money to. Don’t wait to pay until you get the statement (unless you pay off your entire balance every month).

To help illustrate how your balance, interest, and monthly payments interact, we made this infographic for you.

Scroll down to see the infographic, or view the infographic in its own page.