BankDeets

Never Carry a Credit Card Balance: Here’s Why

By Bank Deets · · Updated

Credit cards are easy to get, and even easier to spend money with. For anyone with loose spending habits, that’s their most dangerous feature. Here’s the true cost of carrying a balance on your credit card.

The Overview: Credit cards make everyday purchases quick, easy and secure. As many first-time cardholders find out, they can also make spending a little too easy.

You typically see your full balance only once a month, and small purchases are easy to lose track of. That’s how new and experienced cardholders alike get into trouble.

Interest rates on credit cards are high. The Federal Reserve’s consumer credit report shows the average rate on credit card accounts that were charged interest at roughly 22% in 2026.

Most states have usury laws that cap interest rates, but they usually don’t limit card rates the way you might expect. Banks can generally charge the rate allowed in the state where the bank is based.

You can learn more about the usury limit in your state by clicking here.

Interest on balances that aren’t paid off each month is a major source of revenue for card issuers, and it helps fund the perks cardholders enjoy. You want to be one of the cardholders who enjoys the perks, not one who pays for them.

Small purchases add up quickly on a credit card, and many people also use cards for emergencies. It’s easy to put new tires or a last-minute flight on a card. When those purchases aren’t paid off by the due date, the interest adds up fast.

Credit card interest compounds: unpaid interest becomes part of your balance, and you’re then charged interest on it. That’s how balances spiral out of control.

The Math: Say you put $500 of purchases on your card each month and can afford to pay exactly $500 a month, no more. Then a car accident leaves you with a $1,000 repair bill on the card.

Life goes on, so you keep spending $500 a month and stretch to pay $530: your usual $500 plus $30 toward the $1,000 balance.

At an 18.99% APR, paying $30 a month on that $1,000 takes 48 months, or four years, and costs about $433 in interest. At a 22% APR, it takes 52 months and costs about $560 in interest. (These are simplified estimates with interest compounded monthly; your issuer’s method may differ slightly.)

Yes, it’s that bad. In this example, you’d pay roughly 43% to 56% of the original repair bill again in interest, and it would take years to pay off.

Conclusion:

That simple math shows why carrying a balance is so costly. Imagine how quickly even minimum payments could become hard to make after a job loss or a bigger emergency.

Live within your means, and build an emergency fund so a surprise bill doesn’t have to go on the card. Just because you can buy something doesn’t mean you should.

Technical Discussion on how to calculate interest on credit cards:

Card issuers can use different methods to calculate the interest you owe. Your credit card agreement and monthly statement explain the method your issuer uses.

  1. The Average Daily Balance (ADB) Method This is the most common way issuers calculate monthly interest. It accounts for the fact that billing cycles have different numbers of days. The ADB method starts with the “Daily Periodic Rate” (DPR): the Annual Percentage Rate (APR) divided by 365. (Some issuers divide by 360.)

To then calculate the Average Daily Balance, add up all the daily balances in the billing cycle and then divide by total days in the billing cycle. This produces the average of the daily balances.

Average Daily Balance (ADB) = Sum (Day 1, Day 2, …, Last billing cycle daily balance)/total number of days in the billing cycle.

Next, multiply the Average Daily Balance (ADB) by the Daily Periodic Rate (DPR) to produce the average interest you owe for each day. Next, just multiply that by the number of days in the billing cycle to get the total interest for the billing cycle.

Monthly interest payment = ADB x DPR x (Number of days in the billing cycle)

Example: Sally is going on a trip and wants to make sure she can afford it with the interest she’ll be charged by her credit card that month. Sally’s credit card has an 18% APR interest rate. First, we’ll calculate the Daily Periodic Rate as follows:

DPR = 0.18/365 = 0.000493

Say Sally has a $5,000 balance and makes a $250 payment partway through a 31-day billing cycle, so her balance is $5,000 for 16 days and $4,750 for 15 days. Her Average Daily Balance is:

ADB = (16 × 5,000 + 15 × 4,750)/31 So Sally’s ADB = $4,879.03

Next, we multiply the ADB, the DPR, and number of days in billing cycle (31) to find the monthly interest payment:

Monthly interest = $4,879.03 x 0.000493 x 31 = $74.59

Sally’s interest for the month will be about $74.59.

While the ADB method is most common, credit card companies have two other common ways of calculating monthly interest payments.

The Previous Balance Method Multiply the DPR by the previous month’s balance. Then multiply by the number of days in the billing cycle. If Sally’s balance at the end of the previous month was $5000, the math would look like this:

Monthly interest = 0.000493 x 5,000 x 31 = $76.44

Adjusted Balance Method First find the Adjusted Balance by taking the previous month’s balance and subtracting payments made. Then multiply the DPR by the adjusted balance and the number of days in the billing cycle. With Sally’s $5,000 balance and her $250 payment, you’d get the following result:

Monthly interest = 0.000493 x (5,000 – 250) × 31 = $72.62

Minimum payments are usually set low, so much of each payment goes to interest and only a little to principal. That’s why paying only the minimum takes so long. Your statement includes a minimum payment warning showing how long payoff would take at the minimum.

Sources

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