how does the interest charges work on a credit card?

Question

lets say i owe a cc company 100 dollars and my interest charge is 5%... do i pay them 5% of what i owe every month? so its would be like 105 the first month? then 110.25 the second month? lets just say i dont have any late fees... so it would just keep going like that until i pay it all off?

Answer 1

For most CC you have an interest free grace period from the time of purchase. For a majority of Credit Cards it's 28 to 45 days. Afterwards, if you have not cleared your credit card balance post the grace period, in your example, you will be charged 5% every day pro rata for any balances from that time onwards.

Meaning that 5% is the annual interest rate. Divide by 365 days to get the interest they will charge you daily on your balances. The interest may appear small, but keep in mind if you haven't paid today your debt increases cumulatively, compunding based on daily balances.

This is why before you know it, you'll end up with a huge debt for borrowing a $100.

Answer 2

The 5% is probably an annual rate. Your monthly rate would be, .4167% How that applies to your balance varies by card. Many use the '2 cycle average daily balance' method. This means the add up your balance for each day in the last 2 billing cycles. This number is divided by the total number of days in these billing cycles. The monthly rate is then applied to that number. As someone else said, if you pay your balance in full by the due date, you usually do not pay interest.