How Credit Card Interest Works
Credit cards charge daily compound interest. Most cards calculate your daily rate as APR / 365, then apply it to your average daily balance. This means every day you carry a balance, you accrue more interest. It is the most expensive form of consumer debt.
Minimum Payment Trap
If your card requires a minimum payment of 2% of the balance, paying only the minimum on a $5,000 balance at 24% APR will take over 30 years to pay off and cost more than $10,000 in interest. The minimum payment is designed to keep you in debt.
Fastest Way Out
- Stop using the card immediately
- Pay as much as you can above the minimum — even $50 extra cuts months off your payoff
- Consider a 0% balance transfer card if you have good credit
- Use the avalanche method: pay minimums on all cards, throw every extra dollar at the highest APR card first