Credit card interest: why carrying a balance grows so fast

How credit card interest works

If you pay your full statement balance by the due date, most cards charge no interest on purchases, thanks to the grace period. When you pay less than the full balance, the remaining amount starts accruing interest at the card's APR, and you usually lose the grace period on new purchases too.

Interest is typically calculated daily on your average balance. Each month, unpaid interest becomes part of the balance, so you end up paying interest on interest.

Read also: How to negotiate past-due debt without falling for a scam and Emergency fund: how much to save and where to keep it.

Why the balance snowballs

• High rates. Card APRs are among the highest in consumer credit. Federal Reserve data show that the average rate on card accounts that pay interest has been above 20% in recent years.
• Compounding. What you do not pay becomes the base for next month's interest.
• New purchases on top. If you keep using the card, new spending stacks on a balance that is already growing.

Source: Federal Reserve Board, Consumer Credit, G.19.

What your statement already tells you

Federal law requires a minimum payment warning on every statement: how long it would take to pay off the balance making only minimum payments, and how much you would pay in total. It also shows the monthly payment needed to pay it off in three years. Reading that box is often the wake-up call people need.

How to get out without making it worse

• Stop adding to it. Put the card away until the balance is under control.
• Pay more than the minimum, and if you have several cards, target the highest APR first while paying minimums on the rest.
• Consider a 0% balance transfer if you qualify, but check the transfer fee, usually a few percent, and what happens when the promo ends.
• Look at a lower-rate personal loan from a credit union to consolidate, only if you stop using the cards.
• Call your issuer and ask about hardship programs or a lower rate. See how to negotiate safely.

Afterward, an emergency fund, even a small one, is what keeps the next surprise off the card.

For small business owners

Small firms lean on cards too. In Brazil, 43% of small business owners use credit cards, the second most used financial service, according to a Sebrae and Ipespe survey reported by Agência Sebrae de Notícias (in Portuguese). Sebrae's president, Décio Lima, says the trouble starts when the card becomes a source of financing because working capital is short: the owner covers an immediate need and then faces payments that squeeze the next month's cash flow.

Source: Agência Sebrae de Notícias.

What central banks and regulators say

The Central Bank of Brazil's Financial Education Handbook (in Portuguese) describes compound interest as "interest on interest", the mechanism that makes an unpaid card balance grow so fast. For people already in debt, it advises not taking on new debt, swapping high interest debt for cheaper debt and moving the balance to a lender with better terms when possible.

Some countries cap the damage. In Brazil, since January 3, 2024, interest and charges on revolving card balances and statement installment plans cannot exceed 100% of the debt, under a National Monetary Council rule, according to an Agência Brasil report published by InfoMoney (in Portuguese). In practice, a 100 real balance cannot grow beyond 200 reais.

Sources: Central Bank of Brazil; Agência Brasil, via InfoMoney.

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