How Credit Card Interest is Calculated
Most credit cards calculate interest using the **Average Daily Balance** method. The APR (Annual Percentage Rate) is divided by 365 to get the daily periodic rate, which is then applied to your balance each day.
The Danger of Minimum Payments
Credit card companies usually set minimum payments at around 2-3% of the balance. If you only pay the minimum, a large portion goes toward interest, and it can take decades to clear the debt.
Tips to Pay Off Credit Card Debt Faster
- Pay more than the minimum: Even $50 extra a month can cut years off your timeline.
- Debt Avalanche: Pay off the card with the highest interest rate first.
- Debt Snowball: Pay off the smallest balance first for a psychological win.
- Balance Transfer: Consider a 0% APR balance transfer card to stop interest for 12-18 months.
Payoff Table Example
| Balance | APR | Monthly Payment | Time to Pay Off | Interest Paid |
|---|---|---|---|---|
| $5,000 | 18% | $150 (Min-ish) | 47 months | $2,034 |
| $5,000 | 18% | $250 | 24 months | $995 (Save $1k!) |
| $5,000 | 24% | $200 | 36 months | $2,096 |