Module 4 of 7 14 min
APR and Interest
How interest is charged — and why minimum payments are so expensive.
Course lessons
Step 1
The lesson
Key term
APR (Annual Percentage Rate)
The yearly cost of borrowing, as a percentage. For credit cards, the APR is the interest rate on balances you carry.
Cards usually charge interest daily. The daily rate is the APR ÷ 365. On a 22% APR, that's about 0.06% a day — small each day, but it adds up, and it compounds.
The minimum payment is designed to be small. On many cards, it's about 1% of your balance plus that month's interest. That means most of your payment goes to interest, and the balance barely moves.
Your statement is required to show how long it would take to pay off your balance by making only minimum payments — and how much you'd pay in total. Read that box.
- Pay in full whenever you can.
- Pay more than the minimum — even a little more helps a lot.
- Stop adding new purchases to a card that has a balance.
- Ask your card issuer for a lower APR if you've paid on time.
Step 2
See it
Paying a $2,000 balance at 22% APR: paying only the minimum takes about 139 months and costs about $2,600 in interest. Paying $100 a month takes 26 months and about $514 in interest. Paying $200 a month takes 12 months and about $230.
Step 3
Real-world example
Chris and the $2,000 balance
Chris owes $2,000 on a card with a 22% APR and stops using the card. Three ways to pay it off:
- Minimum only: about 11.6 years, $2,600 in interest — more than the original balance.
- $100 a month: 26 months, about $514 in interest.
- $200 a month: 12 months, about $230 in interest.
The debt is the same. The payment decides whether it costs a couple hundred dollars or a couple thousand.
Step 4
Try it: credit card payoff calculator
Change the payment and compare it with paying only the minimum.
Your numbers
Assumes no new purchases on the card.
Results
Paying $100 a month
2 years, 2 months
$514 in interest
Paying only the minimum
11 years, 7 months
$2,600 in interest
- Balance $2,000
- Interest $514
“Minimum” here means 1% of the balance plus that month's interest, or $25, whichever is more — a common formula. Card issuers vary; your statement shows yours.
Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.
Step 5
Knowledge check
Answer each question, then check your answer to see the explanation. Retake it as many times as you like.
Question 1 of 4
Step 6
Summary
APR is the yearly cost of borrowing. Cards usually charge interest daily, and minimum payments are mostly interest, so balances shrink slowly. Paying more than the minimum — or in full — saves a lot. Watch out for deferred-interest offers.
Step 7
What you should remember
- APR ÷ 12 ≈ monthly interest rate. APR ÷ 365 = daily rate.
- Minimum payments are mostly interest. Pay more whenever you can.
- Your statement shows the true cost of paying only the minimum.
- Deferred interest isn't the same as 0% APR.
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