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WalletPrep worksheet · Debt

How does credit card interest work?

Name ____________________ Date __________

Key ideas

  1. Divide your APR by 12. A 24% APR is 2% a month, so a $3,000 balance costs about $60 in interest for one month.
  2. Pay in full and purchases cost nothing. With a grace period, paying the full statement balance by the due date means no interest on new purchases.
  3. Minimum payments stretch debt over years. Paying only the minimum on $3,000 at 24% takes 183 months and about $4,887 in interest. A fixed $150 takes 26 months.

Vocabulary

APR
Annual percentage rate: the yearly cost of borrowing money, shown as a percentage. It is the number to compare on cards and loans.
Grace period
The time between the end of a credit card billing cycle and the due date, when new purchases are interest-free if you paid in full.
Minimum payment
The smallest amount you must pay on a credit card or loan by the due date to keep the account in good standing.
Balance transfer
Moving debt from one credit card to another, usually to get a low or 0% promotional APR for a set number of months.
Principal
The amount you borrowed, or the part of your balance that is still owed, not counting interest.
Compound interest
Interest earned on both your original money and the interest it already earned, so growth speeds up over time.

Work it out

Jordan has $3,000 on a credit card at 24% APR after a car repair. Jordan compares paying only the minimum with paying a fixed $150 a month.

  1. Monthly rate (24% ÷ 12)
  2. Month 1 interest ($3,000 × 2%)
  3. Months to pay off at the minimum
  4. Months to pay off at $150
  5. Total interest at the minimum
  6. Total interest at $150 a month
  7. Interest saved with $150 a month

Check yourself

  1. Your card has an 18% APR. About what is the monthly rate?

    • A. 1.5%
    • B. 1.8%
    • C. 3%
    • D. 18%

  2. What keeps you from paying interest on new purchases?

    • A. Paying the minimum on time
    • B. Paying the full statement balance by the due date
    • C. Keeping your balance under 30% of the limit

  3. You carry $1,500 at a 24% APR and pay nothing for one month. Using the monthly method, what is the new balance?

    • A. $1,512
    • B. $1,524
    • C. $1,530
    • D. $1,860

Your turn

Open your latest card statement and find three numbers: the purchase APR, the statement balance and the minimum payment warning box. Divide the APR by 12 to get your monthly rate, then set autopay to a fixed amount above the minimum that you can keep paying every month.

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Answer key

How does credit card interest work?

Work it out

  1. Monthly rate (24% ÷ 12)2%
  2. Month 1 interest ($3,000 × 2%)$60
  3. Months to pay off at the minimum15 yr 3 mo
  4. Months to pay off at $1502 yr 2 mo
  5. Total interest at the minimum$4,887
  6. Total interest at $150 a month− $870
  7. Interest saved with $150 a month= $4,017
  1. 24% ÷ 12 = 2% a month, so month 1 adds $3,000 × 2% = $60 of interest.
  2. Paying only the minimum (1% of the balance plus interest) takes 183 months and about $4,887 in interest.
  3. A fixed $150 a month clears it in 26 months with about $870 in interest. That saves $4,887 − $870 = $4,017.

Check yourself

  1. A. 1.5% 18% ÷ 12 = 1.5% a month. On a $2,000 balance that is about $30 of interest in one month.
  2. B. Paying the full statement balance by the due date With a grace period, paying the full statement balance by the due date means no interest on purchases. Paying only the minimum keeps you current but still charges interest.
  3. C. $1,530 24% ÷ 12 = 2%, and $1,500 × 2% = $30. The new balance is $1,500 + $30 = $1,530, plus any late fee.