When Does Interest Get Charged on a Credit Card?

Credit card interest represents the cost of borrowing money, expressed as an annual percentage rate (APR). This charge applies when an unpaid balance remains on an account. Understanding when interest accrues helps cardholders manage their finances and avoid unnecessary costs. Different types of transactions and account behaviors influence the timing and amount of interest charged.

Understanding the Grace Period

A grace period provides a window of time during which interest is not charged on new purchases. This period extends from the end of a billing cycle to the payment due date. If the cardholder pays the entire statement balance from the previous billing cycle in full by the due date, no interest will be applied to new purchases. Most credit cards offer this feature, though it is not a universal requirement for all cards.

The billing cycle is the period during which transactions are recorded, usually lasting around 28 to 31 days. Following the close of the billing cycle, a statement is generated, and a payment due date is set. Credit card issuers are required to provide at least 21 days between the billing cycle close date and the payment due date. This ensures cardholders have adequate time to review their statement and make a payment.

Maintaining the grace period for purchases relies on consistently paying off the full statement balance each month. If a cardholder carries any balance, they will lose the grace period. The grace period applies to purchases and does not extend to other types of credit card transactions.

Transactions That Accrue Interest Immediately

Certain credit card transactions do not benefit from a grace period. Interest begins to accrue from the day the transaction occurs. These types of transactions are treated differently from standard purchases and often carry their own set of terms and conditions.

Cash advances are a primary example of transactions where interest starts accruing immediately. When a cardholder withdraws cash using their credit card, the borrowed amount immediately incurs interest. Cash advances often come with a higher annual percentage rate (APR) compared to regular purchases, and they usually include an upfront transaction fee.

Balance transfers also accrue interest from the transaction date, unless a specific promotional offer is in effect. A balance transfer involves moving debt from one credit account to another, typically to consolidate debt or take advantage of a lower interest rate. While many balance transfer offers include an introductory 0% APR period, without such a promotion, interest charges will begin immediately. These transfers often involve a balance transfer fee.

When Interest Starts After Losing the Grace Period

When a credit cardholder fails to pay the full statement balance by the due date, the grace period for new purchases is forfeited. This means that interest will no longer be waived on new transactions. Instead, interest begins to accrue on those new purchases from the date they are made, rather than from the statement closing date or the payment due date.

In addition to new purchases, interest will also be charged on the unpaid portion of the previous statement balance. This accumulated interest contributes to the overall balance, and if not paid, it can lead to interest being charged on interest in subsequent billing cycles. Making only the minimum payment or a partial payment will result in interest being applied to the remaining balance.

To regain the interest-free period on purchases, the cardholder needs to pay off the entire outstanding balance, including any accrued interest and new purchases, in full for one or sometimes two consecutive billing cycles. Until the full balance is paid off, interest will continue to accrue daily on both the carried-over balance and any new purchases.

Changes in Interest Rates

Credit card interest rates can change due to promotional offers expiring or as a consequence of account mismanagement. Understanding when these rate adjustments take effect is important for financial planning.

Promotional APRs, such as introductory 0% APR offers, provide a temporary period during which no interest is charged on eligible transactions, like new purchases or balance transfers. These promotional periods last for a specific duration, often ranging from 6 to 21 months. Once this introductory period concludes, any remaining balance on which the promotional rate applied will begin to accrue interest at the card’s standard variable APR.

A penalty APR is a significantly higher interest rate that a credit card issuer may apply if a cardholder violates the terms of their credit card agreement. Common triggers for a penalty APR include making a payment 30 or 60 days late, exceeding the credit limit, or having a payment returned due to insufficient funds. When triggered, the penalty APR replaces the standard APR and can be applied to both existing balances and new purchases. Federal law requires card issuers to provide at least 45 days’ notice before implementing a penalty APR. These penalty rates can be very high, sometimes reaching 29.99% or more.