Despite their great rewards and benefits, credit cards can be costly. Credit card interest rates are over 21% on average, and American households pay around $1,000 in credit card interest every year, according to a 2022 report from the Consumer Financial Protection Bureau.

Luckily, you don’t have to pay interest on your credit card account. By knowing exactly how and when your credit card charges interest, as well as what to do before interest accrues, you can avoid taking on high-interest debt balances.

Here’s everything you need to know about credit card interest today:

How does credit card interest work?

When you make purchases using a credit card, those purchase totals are added to your card balance, which you owe at the end of every statement cycle. By your monthly due date, you’ll need to make at least the minimum payment to avoid fees and penalties. But you must pay the balance in full to avoid taking on interest.

Any outstanding balance left after your due date passes will take on interest at your assigned interest rate. Today, average credit card interest rates are over 21%, or over 22% for accounts with assessed interest.

Interest compounds on credit cards, so if you carry a balance month-to-month, you’ll see the amount you owe grow very quickly. This is why carrying a balance on a credit card can put you at risk of taking on very high debt balances that can be difficult to pay down.

Five things to know about credit card interest

Credit card interest rates are much higher today than many other loans and forms of credit. By understanding how credit card interest works, you can better manage your balances and reduce your interest charges.

1. Annual percentage rate (APR)

Credit card interest rates are typically given in annual terms, as the annual percentage rate or APR. Your credit card APR represents the cost of borrowing money by carrying a balance on your card account.

Your issuer will assign an APR when you are approved for a credit card, based on the specific card’s APR range, your credit history, credit score, and other details in your application. In general, you can qualify for a lower APR if you have excellent credit.

You can find your credit card APR anytime on your monthly statement or by checking your online card account.

2. Types of credit card APRs

Credit cards have multiple types of interest charges which apply to different types of transactions. Here are a few common APRs to look for in your card’s terms:

• Purchase APR: The purchase APR is the rate you'll pay when you don’t pay your credit card purchases in full by the due date.

• Balance transfer APR: The balance transfer APR applies to balances you transfer from one credit card to another. Some cards offer a promotional 0% APR on balance transfers for a limited time.

• Cash advance APR: The cash advance APR only applies to cash withdrawals you make with your card. The cash advance APR is usually higher than the purchase APR and begins to accrue immediately.

• Penalty APR: If you miss a payment or pay late, you may take on a penalty APR — a higher rate that will apply to all transactions going forward. You can find information about when a penalty APR applies and how long it may last in your card’s terms.

3. Grace period

Most credit cards have a grace period between the end of each billing cycle and the due date. During the grace period — which is typically about 21 days — your credit card company won’t charge you any interest. But interest will accrue on any unpaid balance you don't pay off by the due date at the end of the grace period.

For example, let’s say your most recent credit card billing cycle ran from Oct. 13 to Nov. 12. You don’t carry a balance on the card, but you made $1,000 in purchases with your card during that time. The grace period for this billing cycle lasts from the statement closing date of Nov. 12 until your payment due date on Dec. 9.

If you pay off the full $1,000 balance before Dec. 9, your credit card company will not charge you any interest. After that date, any remaining balance will take on interest at your ongoing purchase APR.

4. Daily interest

With credit cards, the issuer typically calculates the interest you owe on a daily basis based on your average daily account balance. Your average daily balance is listed on your credit card statement, but you can also calculate it by adding your daily total balances and dividing it by the number of days in your billing cycle. In most cases, the interest compounds, meaning the daily interest is added to your unpaid credit card balance.

See also: Where to find the best credit card interest rates

5. Variable APRs

Unlike personal loans or car loans, which usually have fixed interest rates, credit card APRs are often variable. With a variable rate, your card's APR can change over time, affecting how much interest accrues and your minimum payment amount.

Most credit card companies base interest rates on the prime rate. The prime rate is set by banks and serves as a reference for loans and other forms of credit. Credit card companies typically charge the prime rate plus an added charge, which is known as the margin.

For example, let's say a card's APR is the prime rate plus a range of 12.99% - 19.99%, and the prime rate is currently 7.50%. That would set the card's APR between 20.49% and 27.49%.

(Prime rate [7.50] + the card's margin rate [12.99% - 19.99%] = 20.49% - 27.49% [APR]

The prime rate itself is based on the federal funds rate set by the Federal Reserve. As the federal funds rate and prime rates change over time, the interest rate range set by your credit card issuer will also fluctuate.

Managing credit card interest

Now that you know how credit card interest works, use the strategies below to reduce or eliminate credit card interest charges:

Consider a 0% APR card

A credit card with an introductory 0% APR can be a great way to avoid interest — at least temporarily. As a new cardholder, you’ll earn 0% APR on new purchases or balance transfers (or both) for the first several months after account opening. Many of these cards have introductory APR periods ranging from 12 to 18 months.

However, 0% APR cards aren’t a long-term solution. Once the intro period ends, you’ll begin to accrue interest on any remaining balance. But as long as you can pay off your purchases or transferred balance during the promotional period, you’ll avoid high interest charges.

Here are some of our top 0% APR credit card picks

Pay the statement balance in full

Use the grace period between your statement closing date and payment due date to pay your balance in full. During this period, you won’t accrue any interest on your balance — though after the due date passes, you’ll take on interest at your card’s ongoing APR.

As long as you pay off the statement balance — not just the minimum payment required — by the listed due date, the credit card company won't charge any interest.

By paying off your balances in full without taking on interest, you can ensure you’re maximizing your card’s value each month. For example, if you have a rewards credit card, that means you can use the card and earn valuable points or cash back without ever paying interest charges.

Pay more than the minimum

Although paying off your statement balance in full every month is ideal, it's not always possible. If you can’t pay the total amount due, aim to pay as much as possible. Increasing your credit card payment above the minimum — even by a small amount — can make a significant difference.

For example, say you have a $1,000 balance on a card with a 22% APR and a minimum monthly payment of $30. If you only paid the minimum amount, it would take you over four years to pay off your card, and you'd pay a total of $1,560 — interest charges would add $560 to your repayment cost.

But to pay down your credit card debt faster, you commit to paying an extra $20 per month, bringing your payment to $50. If you paid that amount every month, you'd pay off your $1,000 balance in just over two years, and you'd pay a total of just $1,300. Increasing your payments would get you out of debt two years sooner, and you'd save about $260.

Use our credit card payoff calculator to see how much you can save by increasing your payments.

Request a rate reduction

If you've had a credit card for a while and have made all of your payments on time, contact your credit card issuer and request a lower interest rate. Some companies will reduce the rate to reward and retain loyal customers. A reduction of even one percentage point can help you save money and pay off your debt faster.

If you’re going through a difficult financial period, you can also ask about your credit card issuer’s hardship program options. These programs may include short- and long-term solutions to help you pay down debt with lower APRs, reduced payments, and more.

Read more: Is it possible to get 0% APR on an existing credit card?

---

Editorial Disclosure: The information in this article has not been reviewed or approved by any advertiser. All opinions belong solely to Yahoo Finance and are not those of any other entity. The details on financial products, including card rates and fees, are accurate as of the publish date. All products or services are presented without warranty. Check the bank’s website for the most current information. This site doesn't include all currently available offers. Credit score alone does not guarantee or imply approval for any financial product.