Credit card interest is what you pay when you carry a balance from month to month. It's important to understand how it's calculated, as it can add up fast if you don't pay off your balance in full.

Our guide breaks down how credit card interest works, including what the different types are, how it's charged, and how you can avoid paying more than necessary.

Things to know

• If you don't pay off your balance in full, you'll be charged interest.

• Be aware of the different types of interest rates. Knowing these helps you avoid unexpected charges.

• Credit card interest is based on the Annual Percentage Rate (APR), but it's charged daily. If you don't pay your balance, the interest can add up quickly.

• The best way to avoid paying interest is to pay your balance in full each month. Taking steps like setting up a Direct Debit and reminders can help you stay on track.

• If you're having trouble with payments, don't wait. Contact your provider to discuss options, and check out independent support servicesopens in a new tab.

What is credit card interest?

Credit card interest is the cost of borrowing money if you don't pay off your balance by the due date. It's a percentage of what you owe, added on top of the amount you borrowed.

The higher the interest rate, the more it'll cost you to borrow. So, the more you can afford to pay off each month, the better, as you'll pay less overall in interest.

What is the difference between interest and APR?

Interest rate isn't the only cost of borrowing with a credit card. The Annual Percentage Rate (APR) takes that into account, adding interest to other standard charges, like any yearly fees. It's designed to represent the total cost of borrowing for a year. This gives you a more complete picture of what borrowing will really cost, making it easier to compare options.

When you see a loan advertised with a 'representative' APR, it means at least 51% of customers get a rate that's the same or lower than the representative APR. Usually, not everyone in that 51% will have the same rate.

What are the different types of credit card interest?

When using your credit card, different types of interest apply depending on how you use it. Some transactions come with higher rates and extra charges, so it's important to understand what they are.

Think about how you'll use your card, how much you can pay back, and when, so you can choose the right card for your needs and avoid any surprises. Here are the main types of interest:

Purchase rate

This is the interest you'll pay when you use your card to buy goods or services. It's the most common rate you'll see in ads and APR calculations.

Balance transfer rate

You'll pay this rate if you move your balanceopens in a new tab from one card to another. There might be a fee on top of the interest rate, so make sure you know what to expect.

Money transfer rate

This is interest you pay for moving money from your credit card to a UK current account. Just like with balance transfers, you may also have to pay a fee along with the interest rate. It's worth noting that not all cards come with this feature.

Cash transaction rate

If you withdraw cash with your credit card, interest starts from the moment you make the transaction. Plus, you may face extra fees.

Promotional rate

Some cards offer a lower, or even 0%, introductory APR for a set time. After the promotional period ends, the regular interest rate applies.

Penalty rate

If you miss a payment or break the terms of your agreement, you might be hit with a penalty APR, which is usually much higher than regular rates.

What's a good interest rate on a credit card?

Interest rates on credit cards can change frequently, so there isn't one set 'good' rate. Generally, the lower the rate, the better.

Before you apply, take a moment to check out the average rates. This will help you compare options and find the best deal for you.

The lowest rate you can get is 0%, but remember these rates are usually part of a limited-time introductory offer. After that offer ends, the rate will go up.

How do you calculate interest on a credit card?

Credit card interest is calculated based on the Annual Percentage Rate (APR), which tells you how much it costs to borrow money over a year. But interest is actually applied daily, so lenders divide the APR by 365 to get a daily rate, then apply that to your outstanding balance.

Credit card interest calculation example

If your credit card has an APR of 30%, the daily interest rate would be roughly 0.082% (30% ÷ 365).

Let's say you spend £1,000 in a month but only pay off £50. You'd still owe £950 by the end of the month.

For the first day, the interest would be £0.78 (0.082% x £950). This amount will keep growing each day because the interest is added to your balance, and then the new balance is used to calculate the next day's interest.

If you continue spending or only make low or minimum payments, this can quickly add up, increasing how much you owe.

How much interest will I pay on my credit card?

Exactly how much interest you'll pay on your credit card depends on the interest rate, your outstanding balance, and how much you repay each month.

Use our repayment calculatoropens in a new tab for an idea of how much interest you'll pay on your credit card and how long it'll take to pay off.

Will I pay interest if I pay back my statement balance in full each month?

You usually won't need to pay interest if you pay off your credit card's balance in full by the due date each month.

However, there are a few things that could still lead to interest charges, even if your balance is paid off, such as:

• Residual interest – If you've recently paid off your balance but interest was still building up before the payment cleared.

• Cash withdrawals or foreign transactions – If you withdraw cash or use your card abroadopens in a new tab, interest usually starts right away, with no interest-free period.

• Pending transactions – If there are transactions or refunds still processing, they might not yet be included in your balance.

• Payment timing – If you only paid the balance that shows online, it might not be the same as your full statement balance, which can change daily.

How can I avoid paying interest on a credit card?

Paying interest on a credit card can be avoided or minimised with the right approach. Here are some tips to help you keep your costs down.

Pay as much as you can afford

Paying your balance in full by the due date each month is the best way to avoid interest. If you can't pay the full balance, try to pay as much as you can afford, and always make at least the minimum payment. The more you pay now, the less interest you'll pay later.

You should always be mindful of any other debts or living expenses you need to account for when paying off your credit card.

Set up a Direct Debit

It might help to set up a Direct Debit from your bank account for at least the minimum amount, to help avoid the chance of being late with your payment. Just bear in mind it can take up to six working days for the Direct Debit to be set up, and longer around bank holidays, so you might still need to make your payment manually until it's fully set up.

Set up reminders

You can usually set up automatic email reminders to nudge you when your payment is due. It's another handy way to stay on top of things and avoid late payments.

Avoid cash advances

If you need cash, it's worth looking at cheaper options before using your credit card. Cash advances come with higher APRs, plus a fee (usually 3% to 5%). Interest starts building immediately, so it's best to avoid this if possible.

Take advantage of promotional offers

If you're applying for a new card or paying high interest, look out for promotional offers like 0% introductory APRs. This can help you pay down your balance faster, as you won't be paying off any interest. Just remember to note when the promotional period ends – the APR will increase to the regular rate after that.

Earn an interest-free period

Many card providers offer an interest-free period if you pay your balance on time and in full for multiple months in a row. Doing so can help you avoid interest charges and keep your balance under control.

What happens if I don't pay my credit card balance in full?

If you don't pay your balance by the end of the billing cycle, you'll start paying interest on the remaining amount. You may also be charged default or late payment charges if you don't make at least the minimum payment, which will also accrue interest.

Credit card interest compounds daily, which means any interest you owe gets added to your balance right away. So, you'll end up paying interest on your interest, and your debt will grow, even if you don't make any new purchases.

Carrying a balance month-to-month can also increase your credit utilisation. If that gets too high, it will likely affect your credit score.

What should I do if I can't afford the minimum repayment?

Lots of people come up against financial difficulties from time to time. If you're worried about missing your minimum repaymentsopens in a new tab, you should contact your credit card company and explain your situation, ideally before it gets to that stage.

They can work with you to find a solution, whether it's temporarily pausing your card repayments or setting up a repayment plan that fits your current situation.

There are also organisationsopens in a new tab that offer free, independent support, like StepChangeopens in a new tab, PayPlanopens in a new tab and Citizens Adviceopens in a new tab.

How can I get a better interest rate on my credit card?

If you're looking to lower the interest rate on your credit card, there are a few steps you can take to improve your chances, including:

• Improve your credit scoreopens in a new tab – A higher credit score can help you qualify for better rates on new cards and might even give you the chance to negotiate lower rates on your current cards. Stay on top of your payments, check your credit reports for errors, and avoid applying for new credit too often.

• Pay as soon as possible – Paying off your balance shortly after it's charged can help keep your credit utilisation low, which is key for improving your score and earning better rates.

• Pay multiple times per month – Similarly, making multiple payments each month can lower your credit utilisation rate, which might give your credit score a boost. This can be useful if you can't make a bigger, regular monthly payment.

By making smart moves with your credit, you can boost your score and show you're a responsible borrower. Just remember that not using your credit card responsibly could harm your credit score.

Check if you're eligible for a Capital One card

Use our free tool, QuickCheckopens in a new tab, to see if you're eligible for a Capital One card. You'll get a clear answer in just 60 seconds, and it won't impact your credit score. We'll even confirm your interest rate before you apply, so there'll be no surprises.