How the credit card APR works

Interest charges only apply to credit card debt if you carry a balance from month to month. If you start a billing cycle at zero, then settle the charges in full within that cycle, no interest will be applied. Here’s how you can use high APR credit cards without interest.

However, if you start a billing cycle with an outstanding balance, the creditor applies interest charges to the debt. Is that how it works:

  1. First, the creditor calculates a  periodic interest rate .
    • This is the annual percentage rate divided by the number of “periods” (billing cycles) within a year.
    • In most cases, you can calculate your account’s recurring interest rate by dividing the APR on your bill by 12.
  2. The creditor then applies the periodic rate to your  average daily balance .
    • This is the average balance you had each day of the month.
  3. The creditor multiplies the periodic interest rate by the average daily balance to calculate the interest charges accrued during the month.
  4. When you make a payment, the creditor deducts these accumulated charges from the amount you pay.
  5. As a result, only part of every payment you make goes to pay off principal; that’s the actual debt that you owe.

A high APR leads to higher accrued interest charges. Therefore, if you have high interest rates on credit cards, it will be difficult for you to get out of debt. With minimal payments , you may only pay a few dollars at a time, depending on the APR.