How a credit card works
Each purchase borrows money from the card company, up to your credit limit. Once a month you get a statement with your balance, a minimum payment and a due date.
What APR means
APR stands for Annual Percentage Rate: the yearly cost of borrowing as a percent of what you owe. Credit cards often have APRs around 20% or more. To estimate one month of interest, divide the APR by 12. A 24% APR is about 2% a month.
The grace period
Most cards give a grace period: if you pay the full statement balance by the due date, new purchases aren’t charged interest. Paying only part of it means interest starts.
Why minimum payments are costly
The minimum payment is the smallest amount you can pay without being late. Much of it goes to interest, so paying only the minimum can take years and cost a lot. Try different payments in the calculator below.
Two ways to pay off debt
The avalanche method puts extra money on the debt with the highest interest rate first, which saves the most money. The snowball method puts extra money on the smallest balance first, which gives quick wins that keep people motivated.