Credit cards are convenient tools for daily transactions, but carrying a balance can be extremely expensive due to high interest rates. Unlike fixed-rate personal loans, credit card interest compounds daily, which can lead to rapid debt growth if you only make minimum monthly payments.
Credit cards calculate interest using a Daily Balance Method: - **Daily Rate:** Annual Percentage Rate (APR) divided by 365. - **Daily Interest:** Your daily balance multiplied by the daily rate. - This daily interest is added back to your balance at the end of each billing cycle, compounding monthly.
To see how compound growth builds up savings or debt over time, see our compound interest calculator or check our general interest calculator.
Credit card minimum payments are typically calculated as a small percentage of the balance (e.g. interest plus 1% of the principal). Because this payment is so low: - The majority of the payment goes toward interest. - The principal decreases very slowly, extending your payoff timeline by decades and costing you thousands of dollars in interest.
To calculate payoffs across multiple credit cards, see our multiple credit cards payoff tracker or check our general debt payoff planner.
To eliminate credit card debt efficiently: - Pay More Than the Minimum: Even small extra payments directly reduce the principal balance, saving interest. - Debt Consolidation: Replacing high-interest credit card debt with a lower-interest personal loan. To check consolidated rates, see our debt consolidation tool.
To check how interest rates are calculated across different financial products, try our interest rate finder or see our payment calculator.
Suppose you owe $5,000 on a card with a 20% APR: - If you pay only the minimum (starting at $125/month), it will take over 15 years to pay off, costing approximately $5,800 in interest. - If you make a fixed payment of $200 each month: - You will pay off the balance in exactly 32 months. - You will pay approximately $1,450 in interest, saving over $4,350.
If you need to make simple math calculations, try our everyday daily math helper.
Eliminating high-interest debt immediately increases your household savings rate, allowing you to allocate more money to your emergency funds and investments.
To calculate savings progress over time, try our savings target planner. To check how your monthly net paycheck covers expenses, see our paycheck salary calculator.
Reducing your DTI ratio by paying off debt is key to maintaining a healthy financial profile. It improves your credit score and increases your future borrowing capacity for assets.
For checking general financial ratios, use our general finance calculator. To calculate ratio differences, try our relative ratio solver. To coordinate savings with retirement goals, check our retirement planner.