How Does Credit Card Interest Rate Work?

A credit card interest rate (APR) is the yearly cost of borrowing money on your card when you don’t pay your full balance on time.

If you carry a balance past the due date, the bank charges interest—usually calculated daily based on your APR—until you pay it off.

Avoiding Interest Entirely With KOHO Essential

If you’d rather not deal with credit card interest at all, with KOHO Essential:

• It has a low monthly plan fee that can be waived when you set up direct deposit or add +$1,000.

• Use a prepaid Mastercard® for groceries, bills, subscriptions, and travel.

• Grow your savings with a 2% interest savings rate on your entire balance.

• Earn 1% cash back on groceries, eating & drinking, and transportation.

• You can subscribe to Credit Building for $10/month, it's an affordable way to build your credit history.

• Enjoy unlimited transactions and free e-transfers (never worry about fees when sending money to someone again).

How Credit Card Interest Actually Gets Charged

1. APR (Annual Percentage Rate)

   • The APR is the annual rate, but interest is usually calculated daily.

   • Example: if your APR is 20%, the daily rate is roughly 20% ÷ 365.

2. Daily Interest on Your Balance

   • Each day you carry a balance, the bank multiplies your balance × daily rate.

   • Those daily interest amounts are added up and show on your next statement.

3. Grace Period (When You Don’t Pay Interest)

   • If you pay your full statement balance by the due date, most cards won’t charge purchase interest on that period’s purchases.

   • Once you don’t pay in full, you can lose the grace period, and new purchases may start accruing interest right away.

4. Minimum Payment vs. Paying in Full

   • Paying only the minimum keeps your account from being “late,” but you’ll still pay interest on the rest.

   • Paying the full balance is what actually avoids purchase interest.

A Very Simple Example

Let’s say:

• Your APR is 20%

• You put $1,000 on your credit card

• You don’t pay it off in full and carry that $1,000 for a month

Roughly:

• 20% of $1,000 over a year = $200 in interest per year

• Spread over 12 months, that’s about $16–$17 in interest for one month

So if you keep carrying that same $1,000 month after month, you’ll pay around $16–$17 in interest every month, on top of the $1,000 you still owe—until you start paying it down.

That’s why carrying a balance for a long time can get expensive, even if it doesn’t look huge at first.