How does credit card interest work?

What is credit card interest? 

Credit card interest is the cost of borrowing money on your credit card. When you don't clear your balance each month, your credit card provider charges interest on the amount you still owe.

Your interest rate is shown as an Annual Percentage Rate, or APR. This is the yearly cost of borrowing, which may include fees as well as interest. It's shown as a percentage so you can compare deals and understand what you'll pay.

What is standard purchase interest?

Standard purchase interest is the rate charged on everyday spending — things like shopping, paying bills, or buying groceries. It's the most common type of interest and is usually lower than the rate for cash withdrawals.

Your purchase APR is shown in your credit card agreement as a yearly figure, but it's actually worked out daily based on your outstanding balance.

How is credit card interest calculated?

Credit card interest is calculated daily using the Daily Periodic Rate, or DPR. This is your APR divided by 365 days.

Here's how it works:

1. Your lender looks at your balance at the end of each day.
2. They multiply that balance by the DPR to get your daily interest charge.
3. Those daily charges are added up across the month to give your total monthly interest.

For example, if your APR is 34.9% and your balance is £500, you would pay around £14.50 in interest over a 30-day month — assuming the balance stays the same throughout. Your actual interest will depend on your APR and how much you owe each day.

To see what interest could cost you, try our credit card interest calculator.

Does credit card interest compound?

Yes — credit card interest is compound interest. This means interest is added to your balance every day, and the next day's interest is worked out on that slightly higher amount. So you end up paying interest on interest.

Over a short time, this makes a small difference. But over months or years — especially if you're only making minimum payments — compound interest can add a lot to what you owe.

What do I pay interest on?

You'll be charged interest on:

• Unpaid balances after your grace period
• Cash withdrawals (from the date of the transaction, with no grace period)
• Any balance left after a 0% introductory offer ends
• Foreign currency transaction fees when using your card abroad
• Late payment charges added to your balance
• Any interest already added to your balance

Most everyday purchases are interest-free during a grace period after your statement date. If you haven't paid the full balance by then, interest starts to build on what's left.

Cash withdrawals and cash-like transactions — such as buying foreign currency or making certain transfers — start building interest straight away, with no grace period. They also tend to carry a higher rate than standard purchases.

What is a grace period? 

A grace period is a window of time after your statement date when you can pay off your balance without being charged interest. For most credit cards, this is around 30 days after your statement is issued.

If you clear your balance in full within this window, you won't pay any interest on your purchases. If you don't, interest starts to build on anything you haven't paid.

Some lenders advertise up to 56 days interest-free. This is the combined length of your billing cycle and the grace period that follows it — so the exact number of interest-free days depends on when in the cycle you made the purchase.

Do you pay interest if you pay off your card every month?

In most cases, no. If you pay your full balance by the due date each month, you don’t pay interest. The grace period means you can use your credit card interest-free — as long as you clear the full balance on time.

This only applies to regular purchases. Cash withdrawals start building interest straight away, even if you pay the rest of your balance in full.

When are you charged interest?

You're charged interest whenever you carry a balance on your credit card. Interest builds daily and is usually added to your account each month.

If you don't pay off your full balance by the due date, interest is charged on what's left. If you miss a payment, interest will still build — and you may also be charged a late payment fee.

What happens to your interest rate if you miss a payment?

If you miss a payment or repeatedly pay late, your lender may apply a penalty rate to your account. This is a higher interest rate charged on top of your usual APR, and it can apply to your whole balance — not just new spending.

Not all lenders use penalty rates, but most will charge a late payment fee if you miss your minimum payment. These fees are added to your balance and will also accrue interest.

If you're struggling to keep up with payments, it's worth contacting your lender as soon as possible. They may be able to offer a repayment plan or other support.

How much do I need to pay each month?

Each month, you need to pay at least your minimum payment. This is usually around 3% of your outstanding balance, or £10 — whichever is higher. As your balance falls, so does your minimum payment.

Paying only the minimum will keep your account active, but interest will keep building on the rest of your balance. Where you can, it's worth paying more than the minimum — ideally the full balance — to cut down on the overall interest you pay.

Can I avoid paying credit card interest? 

Yes. There are a few straightforward ways to keep interest costs down:

• Pay your balance in full each month. This is the most effective way to avoid interest. If you pay before the grace period ends, your purchases are interest-free.
• Avoid cash withdrawals. These carry higher rates and start building interest straight away, so it's worth using other methods to pay where you can.
• Use 0% introductory offers. Some credit cards offer 0% interest on purchases or balance transfers for a set period. If you use one, try to clear the balance before the offer ends — after that, the standard rate kicks in.
• Always pay at least the minimum. Missing a payment can lead to fees and higher charges. Setting up a Direct Debit for the minimum amount means you'll never miss one, even if you pay more on top.
• Know your due date. Try to pay a few days before the deadline to allow for processing time.
• Use a credit card interest calculator. If you're carrying a balance, our credit card interest calculator can help you see how much interest you're paying and what a difference paying more each month could make.