How does credit card interest work?
Credit card interest is charged if you don’t clear your balance each month. But how costly might it be and do rates differ depending on the type of spending? Our guide explains
Key Takeaways
You’ll be charged interest if you don’t clear your credit card balance in full each month
Interest builds up daily and can significantly increase what you owe over time, especially if you only make minimum payments.
0% credit cards can help you avoid interest, but be sure to pay off the full balance before the promotional period ends
To avoid interest entirely, always pay your full statement balance on time and avoid cash withdrawals, which often attract immediate interest
Why is interest charged on my balance?
Interest is charged on your credit card balance because you're borrowing money from your card provider – and just like any loan, there’s a cost for that borrowing.
When you don’t pay off your balance in full each month, the lender charges interest (usually shown as an APR – Annual Percentage Rate) on the amount you still owe.
This interest helps card providers cover the cost of lending and the risk they take in allowing you to borrow.
How is credit card interest calculated?
Credit card interest is calculated based on your card’s Annual Percentage Rate (APR), which is the yearly cost of borrowing.
However, interest is usually applied daily – so lenders divide the APR by 365 to get a daily rate, then apply that to your outstanding balance.
Most credit cards offer an interest-free period on purchases – typically up to 56 days – but this only applies if you pay off your full balance each month.
If you only make the minimum payment, or carry a balance, interest kicks in and can build up quickly.
Example:
Let’s say your credit card has an APR of 20% and you spend £1,000 in a month. If you only pay £50 off at the end of that month, you’ll still owe £950. The daily interest rate would be roughly 0.055% (20% ÷ 365).
Interest for the first day would be £0.52, and it continues to build each day based on your new balance (which includes the interest already added). Over time, this can significantly increase what you owe – especially if you keep spending or only make minimum payments.
To reduce how much interest you pay, aim to clear your balance in full each month or pay as much as you can above the minimum.
Want to assess your own situation? Our credit card interest calculator can show you how long it will take to pay off what you owe.
Do different types of spending incur different rates of interest on a credit card?
Yes, to make it slightly more confusing, different types of spending can attract different interest rates on a credit card.
Most cards have a standard purchase rate, but other transactions like cash withdrawals, balance transfers, or using your card abroad often come with higher interest rates – and may not benefit from any interest-free period.
Do I get charged interest if I pay the minimum balance?
Yes, if you only pay the minimum amount on your credit card, you will usually be charged interest on the remaining balance.
Credit card providers typically apply interest daily on any unpaid amount after the payment due date, unless you clear your balance in full each month.
Paying just the minimum may keep your account in good standing and help you avoid late payment fees, but it will also mean it takes much longer to repay what you owe.
Interest will continue to accrue, and you could end up paying significantly more overall.
For example, a balance of £1,000 with an APR of 20% could take years to pay off if only minimum payments are made – and cost hundreds of pounds in interest.
To avoid paying interest, it’s best to pay off your full balance each month. If that’s not possible, try to pay more than the minimum whenever you can. This reduces your balance faster and cuts down the interest you’ll pay over time.
How does credit card interest work?
Here are three examples showing how credit card interest works over time. For each case we’ll assume an initial £1,000 balance with an interest rate of 29% APR, based on typical UK credit card terms.
These examples show the impact of different repayment behaviours:
After one month
Repayment: £1,000 paid in full before the due date.
Outcome: No interest charged thanks to the interest-free period (up to 56 days on purchases). There are no other fees and Darren’s credit record stays positive. This is the most cost-effective way to use a credit card and Darren avoids paying any interest.
Minimum payment: 3% of balance or £5 (whichever is greater)
Repayment: £30 (3% of £1,000).
Outcome: Steph is charged £22 interest on the remaining balance, giving a new balance of £992 and interest continues to accrue monthly. While the account remains in good standing, this is a costly way to borrow long-term.
Repayment: £0
Outcome: £24 interest is added due to the full balance remaining. Fred also receives a £12 late payment fee, which is typically charged by most UK card providers. Fred’s new balance is £1,036 and his missed payment is reported to credit reference agencies, leaving a negative mark on his credit score.
Example 1: Darren pays off his full balance
Example 2: Steph makes only the minimum required payment
Example 3: Fred makes no payment at all
After one year
Here's an extended 12-month view of how interest, fees, and repayments affect each of our three credit card users:
Any further spending was also paid off in full over the year.
Interest charged: £0
Fees: £0
Balance after 12 months: £0
The way Darren has used his credit card means it hasn’t cost him a penny in interest, and it also looks good on his credit report, putting him in a better position for future borrowing.
Darren could benefit even more if he had a rewards credit card that could offer cashback, points or other perks on his spending.
Minimum payment: 3% of balance or £5 (whichever is greater)
Interest charged: £220 Fees: £0 Balance after 12 months: £890
Despite no further spending, Steph only paid the minimum each month, which gradually decreased as her balance reduced. This brought her total payments, including interest, to about £330 for the year, but the balance remained at £890.
If she continued to only pay the minimum amount it would take around 11 years to clear the initial £1,000 spend. She would end up paying £1,360 in total interest – £360 more than she spent originally.
Repayment: £0
Late payment fees: £144 (£12 per missed month)
Interest charged: £370 (compounded on the full balance, plus fees)
Balance after 12 months: approx. £1,514
Fred pays a heavy price for not addressing his situation. Not only does he face an additional £514 in interest and fees, but his credit score is likely to be damaged due to the missed payments.
If it continues, his account could be defaulted and passed to debt collectors with legal action taken.
Example 1: Darren spent £1,000 in the first month and paid it off before the due date
Example 2: Steph continued to only make the minimum payment every month
Example 3: Fred continues to make no credit card payments
The following table shows what happens after 12 months following a £1,000 spend on a credit card:
Example | Total paid | Interest & fees incurred | Balance after 12 months | Credit impact |
|---|---|---|---|---|
Full payment (Darren) | £1,000 | £0 | £0 | Positive |
Minimum payment (Steph) | £330 | £220 | £890 | Neutral to slightly negative (slow repayment) |
No payment (Fred) | £0 | £514 | £1,514 | Very negative (missed payments, possible default) |
How do 0% credit cards work?
Zero percent interest credit cards give you an extended time to clear your balance before interest kicks in.
Whether it’s paying off a big purchase or clearing debt that has built up elsewhere, a 0% credit card can be a useful financial tool to save you money.
Here’s an example of how they work:
You have £3,000 on a credit card charging 29% APR. If you stick with it and only pay £100 each month, you’d pay around £1,000 in interest over three years.
Now, switch that debt to a 0% balance transfer card with a 32-month interest-free period. You pay a 3% balance transfer fee (£90 on £3,000), but after that, you’ll pay no interest on your transferred balance – as long as you repay it within the 32 months.
If you pay £100 per month, you’d clear the full £3,000 in exactly 30 months – interest-free.
There are a few things to note:
Clear the full balance before the 0% period ends or the standard APR kicks in
Avoid new purchases unless you have a dedicated purchase and balance transfer card. They might not be interest-free and can complicate repayments
Pay on time. Missing a payment could cancel the 0% deal
How do I avoid paying interest on my credit card?
To avoid paying interest on your credit card, clear your full balance each month before the due date. This way, you’ll benefit from the card’s interest-free period – usually up to 56 days on purchases.
Choosing a 0% purchase card can also help avoid interest for a set period.
Setting up a Direct Debit to pay in full can help you stay on track. If paying in full isn’t possible, aim to pay more than the minimum to reduce interest charges and clear your balance faster.
Finally, avoid cash withdrawals with your credit card because these often attract interest from day one.
Why am I being charged interest on a card with no outstanding balance?
If you’re being charged interest despite having no outstanding balance, there are a few possible reasons.
The most common is that you recently paid off your balance, but interest was still building up before the payment cleared.
This is called residual interest – it can appear on your next statement even if your balance now shows £0.
Another reason could be if you took out cash withdrawals or used your card abroad, which often attract interest immediately, with no interest-free period.
Also, check for pending transactions or refunds – these might not be reflected yet in your balance.
Finally, ensure your last payment covered the full statement balance, not just the current balance shown online, which can fluctuate daily.
It’s a good idea to check your latest statement or contact your card provider for a breakdown – they can explain exactly where the charge has come from.
Compare credit cards with MoneySuperMarket
MoneySuperMarket is ideal for comparing credit cards, offering options tailored to your individual financial situation.
We’ll show you all the key features, such as interest-free periods, rewards and the APR, and when you use our eligibility checker you’ll find out your chances of approval without leaving a mark on your credit report.
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead, we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.
