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.
Read 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.
Work out the daily rate and it looks tiny on its own: 22.99% divided by 365 is about 0.063% a day, or $0.63 of interest on a $1,000 balance for a single day. Compound that daily rate for a full year, though, and the effective annual rate comes out to roughly 25.84% — nearly three full percentage points above the 22.99% printed on the card, purely because the interest is being calculated on interest every single day rather than once at year's end.
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.
There is a second, quieter mechanic working against you on larger balances: because the minimum is a percentage of the balance, it shrinks along with the balance. At 2%, a $5,000 balance carries a $100 minimum; by the time it's down to $3,000, the minimum has recalculated to $60. Every step of progress makes the next required payment smaller, which is exactly why a minimum-only payoff drags on.
On the $1,000 balance in the chart below, the $25 floor is what sets the minimum instead (2% of $1,000 is only $20). Work out the first month: 22.99% ÷ 12 is about 1.92%, so roughly $19.16 of interest accrues. Of the $25 payment, only about $5.84 actually reduces what you owe.
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.
The real payoff timeline runs years past a single chart
The chart above stops at twelve months, because a year is long enough to see the shape of the problem. It is nowhere near long enough to see the end of it.
77 months — 6.4 years — to pay off a single $1,000 balance making only minimum payments at 22.99% APR, assuming not one more dollar gets charged to the card in the meantime. Total interest paid along the way: $915. Total paid, principal and interest combined: $1,915 — nearly double the original purchase, on a card that never added a single new charge.
This is the number printed on the back of a real statement, in the box titled something like 'Minimum Payment Warning' — most people have never read it.
77 months to clear $1,000. $915 in interest — almost as much as the original balance.
12 months to clear the same $1,000. About $121 in interest — roughly an eighth of the minimum-only total.
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, which turns a printed 22.99% APR into an effective annual rate closer to 25.84%.
- Minimum payment formulas are calibrated to be small on purpose — a flat floor or 1-2% of the balance keeps repayment slow by design, and shrinks further as the balance does.
- A single $1,000 balance on minimum payments alone takes 77 months to clear and costs $915 in interest — nearly doubling the original amount before it's paid off.
- The same balance at a fixed $100 a month clears in 12 months for about $121 in interest, roughly an eighth of the minimum-only cost.
- 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.
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