Understanding how you're charged interest on your credit card is the key to knowing how to manage your card debt. Here's how it works.
Credit cards charge interest on any balances that you don't pay by the due date each month. When you carry a balance from month to month, interest is accrued on a daily basis, based on what's called the Daily Periodic Rate (DPR).
DPR is just another way of saying what your daily interest charge is. That's calculated by taking your credit card's Annual Percentage Rate (APR) and dividing it by 365, for all the days in the year.
So if your card has a 15.99% APR, your DPR would be 0.0438%.
The reason why credit card balances can quickly build up on cards with high APRs is because of compounding interest charges that occur on a daily basis.
At the end of each day, the interest charge is calculated and added to your balance for the next day. This continues every day for the billing period, so the interest you're charged one day becomes part of the balance on which interest is charged the next day, and so on. At the end of the month, the lender will add up all of these daily interest charges and put it on your card as a finance charge.
How long before interest is charged on a credit card?
Most credit cards provide an interest-free grace period of around 21 days — starting from the day your monthly statement is generated, to the day your payment is due. However, if you don't pay it during that time, an interest charge will go into effect and you will end up with a balance that rolls over to the next month.
Is credit card interest charged monthly?
Interest is charged on a monthly basis in the form of a finance charge on your bill. If you have a revolving balance, you will lose that 21-day interest-free grace period on purchases. Interest will accrue on a daily basis, between the time your statement is issued and the due date, which means that you'll have an even larger balance due, even if you haven't used your card during that month.
Let's say you didn't pay off your card in full in August and you have a $1000 balance that carries over until you receive a new statement on September 1. Even though your payment isn't due until September 30, interest will be accruing every day between September 1 and when you pay it, because you've lost the grace period.
That means that even if you pay off all of the $1000 balance by September 30, your October 1 bill will have a balance made up of the interest you've accrued on that balance from September 1-29.
How do I pay down my credit card?
You can manage to pay down your balance by:
- Paying your bill as soon as you get it. Don't wait until the last due date to pay it, because there is a lag between when the bill is issued and the date due, during which you're being charged interest on your previous month's balance.
- Paying your bill several times during the month. Doing so will also reduce the amount of daily compound interest charge accrued.
- Transferring balances to a 0% card. There are balance transfer cards out there that offer 0% promotional APR periods. Before you transfer your balance:
- Calculate the amount you would need to pay every month to get rid of the balance before the 0% promotional APR period ends and then transfer over what you think you can afford to pay. High APRs usually kick in once the promotion ends.
- Put those monthly payments on autopay, because you might lose the 0% if you're late to pay the bill. Consider any fees related to the balance transfer, and factor those in to your total cost.
Interest charges are complicated, and credit cards can become expensive financial tools if the balances build up over time. Understanding how interest is accrued on the card can help you understand more about how your payments are being applied and help you pinpoint methods for paying off your cards.
You should always pay your credit card bill by the due date, but there are some situations where it's better to pay sooner.
For instance, if you make a large purchase or find yourself carrying a balance from the previous month, you may want to consider paying your bill early. It seems like a small change, but it can have a significant effect on your overall finances and help protect your credit score.
CNBC Select explains when it makes sense to pay your credit card balance early and how the timing of your payment affects your credit score.
When to pay your balance early
While you're required to make at least the minimum payment on your statement balance by the due date to keep your account current, you should always aim to pay it off in full each month.
However, that's not always possible, especially now due to coronavirus-related layoffs and record unemployment rates.
As a result, you may carry a balance month-to-month. Depending on the size of your balance, this can cause you to incur thousands of dollars in interest charges if you only make the minimum payment. But if there's a month that you have extra money left over after essential expenses, you should use it to pay your credit card bill early, rather than waiting until the due date.
When you pay the bill early, you save yourself some interest, says Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report. Card issuers charge daily compounded interest (which is interest charged on interest), and it grows pretty quickly. Even if you pay just a few days early, you can knock off some of those charges and save.
When to make multiple payments on your credit card bill
If your credit card bill is higher than usual because you've made a large purchase, such as new workout equipment or office furniture, your credit utilization rate, or the percentage of your total credit you're using, will go up. This is most noticeable when you have a lower credit limit.
The change in your balance can potentially lower your credit score since utilization is the second most important factor of your credit score. It's important to maintain a low credit utilization rate below 30%, and ideally 10% if you really want a good credit score.
In these situations — and any time you have a higher-than-normal balance — it can be a good idea to make multiple payments during your billing cycle or simply pay the entire balance before your due date. Paying your balance more than once per month makes it more likely that you'll have a lower credit utilization rate when the bureaus receive your information. And paying multiple times can also help you keep track of your spending and cut back on any overspending before you fall into debt.
On the other hand, waiting until your billing cycle closes to make one large payment makes it more likely that the bureaus will see the high balance, since it's reflected on your statement.
Let's say your billing cycle ends on the 10th of every month, and your card issuer reports to the credit bureaus on the 11th. If you typically spend $1,000 on a card with a $5,000 credit limit, your utilization is 20%. But if you make an additional $2,000 in charges for home renovations on the 1st, on top of the $1,000 you usually spend, your utilization would increase to 60%.
However, you can reduce your utilization by paying some of your balance before your billing cycle ends on the 10th. You could pay off the extra $2,000 in charges on the 2nd, and lower your utilization back to 20% by the time your billing cycle ends. The simple action of paying part of your balance early can reduce any potential negative impacts to your credit score.
When card issuers report your balance to the bureaus
Your credit card balance is reported to the credit bureaus at varying times throughout your billing cycle, depending on each lender. If you're unsure when your balance will be reported to the bureaus, call your card issuer to ask the exact date, Harzog recommends.
"Very often, it's the day after the closing date on your statement, but not always," she says. "Find out when that is so you can strategically make your payments."
The dates will probably differ based on the billing cycle for each card. Most lenders calculate your utilization rate based on your statement balance instead of the current balance.
When you should change your bill due date
If you struggle to have cash on hand when your due date rolls around, most card issuers allow you to change the day your payment is due. This allows you to select a day that works best for you (maybe adjust it closer to the days you get paid), which could help you make full payments every month.
On the other hand, if you can't pay in full because of overspending, consider cutting back on non-essential expenses, such as streaming subscriptions or gym memberships.
And if you're falling behind on payments because of a temporary layoff or cut-back on your working hours, you may want to consider using a 0% APR card so you can pay off debt over time with more flexibility on when the entire balance is due.
Cards like the Wells Fargo Active Cash® Card can help you finance new purchases with 0% intro APR for 15 months from account opening on purchases and qualifying balance transfers (after, 18.74%, 23.74%, or 28.74% variable APR; balance transfers made within 120 days from account opening qualify for the intro rate and fee of 3%, then a balance transfer fee of up to 5%, $5 minimum, applies; see rates and fees). Keep in mind that this card requires good or excellent credit. And while it can help you temporarily avoid interest charges, you'll still need to make minimum payments during the no-interest period.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.