Understanding credit card interest

Before you start using your new credit card, it’s important to understand how credit card interest works. We’ve collected the top tips to help you avoid extra charges while making the most of your credit card rewards.

When it comes to paying for your day-to-day expenses, a credit card is a safe and convenient option. Using credit is an easy way to pay for everything from your streaming subscriptions to that trip to Rome. 

But before you start charging everything to your card, there’s one important thing you need to know — what is credit card interest and how does it work?

Having a basic understanding of credit card interest can help you maximize the benefits of your card and avoid racking up extra charges. This guide breaks down all the basics, from how interest is calculated to finding a low-interest card, so you can be smart and savvy with your credit card.

How does credit card interest work?

Credit card interest is the amount your card issuer charges you if you don’t pay your card balance in full by the due date. You’ll keep paying a percentage of your outstanding balance in interest until you’ve paid off your balance entirely.¹

Now let’s dig deeper into credit card interest:

• First, here’s how credit cards work: When you buy something with a credit card, you’re basically borrowing money from a credit card issuer (like BMO) , and you’ll start building up a balance, which is the amount you’ll owe back at the end of the billing cycle.
• What to know about your billing cycle: Your billing cycle is the period of time between billings, usually somewhere between 27 and 31 days. At the end of your billing cycle, you need to pay off your balance, or you’ll be charged interest on the amount you owe.
  
• Paying off your credit card: You can pay off your balance in full, or just a portion of it. The lowest amount you can pay each month is called your minimum payment, which you can find on your credit card statement. If you pay everything you owe by the due date, you won’t be charged interest on your purchases.²

But if you only pay a portion, the remaining balance carries over to your next billing cycle, and you’ll accrue daily interest on the amount you owe. This means you’ll have to pay interest on your purchases from the day you make them till the day you pay them off.

Let’s say you have a $1,000 balance on your card, and your payment is due by January 31st. If you pay off the $1,000 by that date, you won’t be charged any interest. For the next 21 days (also known as your grace period), any new purchases you make with your card will be interest-free. If you don’t pay off your balance in full, your grace period will increase to at least 25 days on your next credit card statement, but you’ll be charged a daily interest on $1,000 from the date of each purchase until the day you make a payment towards your credit card.

If you pay off $1,000 by the due date, your grace period will go back to 21 days on your next statement. If you only pay $500, you’ll lose your grace period and will be charged daily interest on the remaining $500, plus any purchases you make during the next billing cycle.

Here's another example that shows what your interest charges could look like, if you don’t pay your balance off in full.

Let’s say you accumulate a balance on your card of $3,000, and your APR is 12.99%. If you pay $200 per month toward your balance, you’ll wind up paying around $291.58 in interest over the span of 17 months before your balance is paid off in full.