The Cost of Carrying a Balance
Card interest compounds daily on most cards, and the minimum payment is calculated to keep that going as long as possible. Watch what carrying $1,000 actually costs over a year of minimum payments alone.
Worth reading first: How Credit Cards Really Work
Missing the grace period once doesn't just cost you interest on this month's purchases. It hands the card issuer a balance that compounds daily, and a minimum payment formula engineered to keep that going for as long as legally possible.
APR compounds daily on most cards
Most cards quote an APR — annual percentage rate — but apply it as a daily periodic rate, roughly APR divided by 365, charged every single day against your current balance. A card at 22.99% APR is charging interest on interest constantly, not once a year — the same compounding mechanic that makes savings grow works identically in reverse against a carried balance.
The minimum payment is designed to be slow
A typical minimum payment formula is the greater of a flat floor — often $25 to $35 — or a small percentage of the balance, commonly 1 to 2%. That percentage is deliberately calibrated so that, after interest is added back, the balance shrinks only slightly each month. Card issuers are legally required to disclose how long paying only the minimum would take — the number is usually measured in years, not months, for exactly this reason.
Minimum payments only
Balance after 12 months: still $922, after paying $222 in interest.
$100 a month
Paid off in 12 months, for $121 in interest.
What carrying $1,000 actually costs over a year
The chart above runs the same $1,000 balance two ways: minimum payments only, and a fixed, modestly higher payment. The minimum-only path barely dents the balance across a full year and pays real money in interest for the privilege. The fixed-payment path clears the debt entirely and pays a fraction of the interest — from the same starting balance, at the same rate.
Key takeaways
- Card interest is usually applied as a daily rate against the current balance, so it compounds far more often than the word 'annual' suggests.
- Minimum payment formulas are calibrated to be small on purpose — a flat floor or 1-2% of the balance keeps repayment slow by design.
- The same $1,000 balance can cost real money in interest paid over a minimum-only year, or a fraction of that paid off with a modestly higher fixed payment.
- Treat the minimum payment as a legal floor, not a plan — paying more than it shortens the payoff far more than the extra dollar amount suggests.