How credit card interest actually works
A credit card gives you a revolving line of credit. Pay the full statement balance by the due date and you owe no interest, you got a 21 to 25 day interest-free loan. Carry a balance and interest accrues on the entire balance, often from the transaction date, at the card’s purchase APR. As of 2024, the Federal Reserve reports the average assessed APR on US credit card accounts is roughly 22%. Cash advances and balance transfers carry separate (usually higher) APRs and no grace period.
Charge $5,000 on a 22% APR card and pay only the 2% minimum ($100). It takes more than 30 years to pay off and costs over $7,400 in interest, more than the original purchase. Pay $250 a month instead and you’re done in 24 months with about $1,200 in interest. The same $5,000 balance; the difference is entirely in the monthly choice.
Treating the minimum due as a payment plan. It is a debt-trap accelerator, the schedule is engineered so the bank earns maximum interest. Pay the full statement balance every month, no exceptions. If you can’t, you’re overspending, not under-earning.
A 60-second lesson on this, with a worked drill, lives inside the Finlo app. Free, forever, on the basics.