A credit card quotes an annual percentage rate, but charges monthly. A 24% APR is 2% a month.
Step 1: Let's Learn
Read it, or press Listen and follow the words.
Paying in full costs nothing
Pay the full statement balance by the due date and most cards charge no interest at all. The card is free at that point.
Carrying a balance
Once a balance carries over, interest applies monthly and compounds. The grace period usually disappears too.
The minimum payment
A minimum payment is often around 2% of the balance, which barely exceeds the interest. Progress is close to zero.
How long it takes
A $3000 balance at 24% APR, paid at the minimum, takes decades and costs more in interest than the original purchase.
What to do instead
Pay as far above the minimum as the budget allows, and clear the highest rate first.
Minimum payments are designed to be slow
A minimum payment is typically a small percentage of the balance. Paying only that on a large balance at a high rate can take decades and cost more in interest than the original purchases.
The grace period
Balances paid in full by the due date usually incur no interest. Carry any balance and interest may apply from the purchase date, including on new purchases. The behaviour changes entirely once a balance is carried.
APR and daily interest
The annual rate is divided into a daily rate and applied to the balance each day. That is why the balance grows continuously rather than in one monthly step, and why paying earlier in the cycle helps.
Do the arithmetic before borrowing
Computing the total repaid at the minimum payment turns an abstract rate into a concrete number. Most people find that calculation more persuasive than any general warning about credit.
Step 2: Try It Yourself
Tap and try it out.
Monthly interest
Minimum payment
Minimum payment has the most. It has 15 more than Monthly interest.
Step 3: Watch an Example
One step at a time.
Watch Yusuf Check a Minimum Payment
A $3000 balance at 24% APR, with a minimum payment of 2.5% of the balance.
- Step 1
The monthly rate is 24 ÷ 12 = 2%, so interest is 0.02 × 3000 = $60.
Step 4: Your Turn
Practice makes it stick.
The Monthly Rate
Problem 1 of 2
An APR of 18%. What is the monthly rate, in percent?
%
The Charge
Problem 2 of 2
A $2000 balance at 1.5% a month. Interest this month, in dollars?
dollars
The Cost of Carrying
1 of 8
APR 24%. Monthly rate in percent?
2 of 8
$3000 at 2% a month. Interest in dollars?
3 of 8
Minimum of 2.5% on $3000. Payment in dollars?
4 of 8
Payment $75, interest $60. How much comes off the balance, in dollars?
5 of 8
$1200 at 1.5% a month. Interest in dollars?
6 of 8
Paying the full statement balance on time. Interest charged, in dollars?
7 of 8
Put the debt payoff priorities in order, best first.
- 1Pay well above the minimum on any balance carried.
- 2Clear the highest rate debt first.
- 3Pay only the minimum.
- 4Pay the full statement balance every month.
8 of 8
$5000 at 2% a month. Interest in dollars?
Step 5: Quick Check
Show what you know.
Question 1 of 2
APR 12%. What is the monthly rate, in percent?
Question 2 of 2
Why does a minimum payment barely reduce a balance?
What You Learned
- A quoted APR is charged monthly, so divide by 12.
- Paying the full statement balance avoids interest entirely.
- A minimum payment barely exceeds the interest, so the balance hardly moves.