Credit cards and revolving debt: interest, grace periods and minimum payments
A credit card is a loan with no fixed end. You borrow up to a limit, repay when you choose, and the lender charges interest on whatever is left. That flexibility is convenient, and it makes card debt easy to underestimate. This lesson explains how card interest is worked out, what a grace period does, why a minimum payment can take a decade to clear a modest balance, and how Capital One and American Express differ in their card losses.
- Level
- Beginner
- Reading time
- About 24 minutes
- Know this first
- Credit risk and expected loss
By the end you will be able to:
- distinguish revolving credit from an instalment loan
- explain how card interest is charged daily on the average balance, and what a grace period does
- calculate how long a balance takes to clear on minimum payments, and what it costs
- show why paying a fixed amount clears a card faster than paying the shrinking minimum
- read card-loss figures from two card issuers and say what they cannot show
A loan with no end date
The loans in the earlier lessons had a fixed amount, a fixed term and a level payment. A credit card is different. It gives a credit limit, a ceiling on what can be owed, and the cardholder borrows and repays as often as they like. This is revolving credit: the amount outstanding rises and falls with purchases and payments, and nothing says when the balance must reach zero. Each month the card company asks for only a minimum payment.
That flexibility is why cards are so widely used, and why the cost of carrying a balance is easy to misjudge. This lesson uses a fictional $3,000 balance to show how interest is charged, what the grace period does, and how the length of time to repay is affected by the way the minimum is set. It then compares the card losses that Capital One and American Express reported for 2025.
How card interest is charged
Card interest is quoted as an annual rate, the APR discussed in the previous lesson, but it is charged much more often. According to the US Consumer Financial Protection Bureau, many card companies work out the interest daily on the average daily balance, using the daily periodic rate, which is the daily share of the annual rate. Interest builds up every day the balance is outstanding, and the contract in the bureau's model agreement says interest is calculated daily with compounding, so interest is charged on interest. Purchases, cash advances and balance transfers may each have their own rate, and a payment above the minimum is generally applied first to the balance with the highest rate.
The calculator in this lesson charges interest once a month, at the APR divided by 12, which is close to the daily method and simpler to follow. No new purchases are made, so that only the repayment of one balance is shown.
The grace period
A grace period is the time between the end of the billing cycle and the payment due date during which no interest is charged on purchases, if the balance is paid in full. In the bureau's wording, a card with a grace period lets the cardholder avoid interest on purchases by paying the whole balance by the due date each month. The model agreement adds that missing a full payment loses the grace period until a set number of on-time months have passed. The consequence is stark. Take $1,200 of purchases on a card with a 21% APR. Paid in full by the due date, they cost nothing. Left unpaid for a month, they cost 1,200 × 21% ÷ 12 = $21.00 in interest, and the new purchases that follow may also start to carry interest from the day they are made.
The grace period is why two people with the same card can pay very different amounts for it. One who pays in full each month borrows free for a few weeks. One who carries a balance pays interest, and the next sections look at what that costs.
The minimum payment
The minimum payment is set by the card company, and rules differ. A common design is the interest for the month plus a small share of the balance, with a fixed floor. This lesson uses interest plus 1% of the balance, and never less than $25. Because the payment includes the interest, the balance does fall, but because it is tied to the balance it falls ever more slowly. The payment shrinks as the debt shrinks, so the end keeps moving away.
The alternative is to fix the payment. If the cardholder pays the same dollar amount as the first minimum every month, the payment does not shrink, and nearly all the extra goes against the balance.
Pay down a card
Set the balance, the APR, how much of the balance the minimum adds to the interest, and any extra amount paid each month. The left page pays only the shrinking minimum, with the extra if there is any. The right page pays the same dollar amount as the first month's payment every month.
A $3,000 balance at 21% APR with the minimum set at interest plus 1.0% of the balance takes 14 years and 10 months to clear and costs $4,208 in interest, starting from a first payment of $83. Paying that same $83 every month instead takes 4 years and 11 months and costs $1,811, which saves $2,397 of interest.
Four experiments. First, at the starting settings the first payment is $83: the month's interest of $52.50 plus 1% of the balance, $30. Paying only the minimum, the card takes 14 years and 10 months to clear and costs $4,208 in interest, so the $3,000 purchase costs $7,208 in all. Paying $83 every month instead takes 4 years and 11 months and costs $1,811, saving $2,397. Second, add $50 a month in extra payments. The first payment is $133, the card clears in 3 years and 8 months and the interest falls to $1,143. Third, set the APR to 30% and the minimum to interest plus 2%. The first payment is higher, and still the card takes 9 years and 9 months and costs $3,321 in interest, because the rate is high. Fourth, raise the balance to $10,000 at 30% with the minimum back at 1%: the first payment is $350, the card takes 26 years and 2 months to clear and the interest is $23,768, more than twice the amount borrowed.
The effect of the minimum rule, for the $3,000 balance at 21%:
| Minimum rule, $3,000 at 21% | First payment | Time to clear on minimums | Interest on minimums | Interest if the first payment stays fixed |
|---|---|---|---|---|
| Interest plus 1% of the balance | $83 | 14 years and 10 months | $4,208 | $1,811 |
| Interest plus 2% of the balance | $113 | 9 years and 3 months | $2,281 | $1,076 |
| Interest plus 3% of the balance | $143 | 7 years | $1,579 | $775 |
| Interest plus 4% of the balance | $173 | 5 years and 9 months | $1,210 | $609 |
A higher share of the balance in the minimum shortens the time sharply, and paying the first month's amount as a fixed payment shortens it far more. The last column shows the interest if the first payment simply stays the same every month, whichever rule set it.
The effect of the rate, with the minimum at interest plus 1%:
| Rate, $3,000 with minimum of interest plus 1% | First payment | Time to clear on minimums | Interest paid | Interest as a share of the balance |
|---|---|---|---|---|
| APR of 12% | $60 | 13 years and 1 month | $2,242 | 75% |
| APR of 18% | $75 | 14 years and 3 months | $3,539 | 118% |
| APR of 24% | $90 | 15 years and 3 months | $4,887 | 163% |
| APR of 30% | $105 | 16 years and 2 months | $6,268 | 209% |
The rate decides how much of the payment is interest. At 30%, the interest over the life of the balance is about twice the $3,000 borrowed. At 12% it is about three-quarters of the amount borrowed, which is much less, though minimum payments still stretch the debt over more than a decade.
Capital One and American Express
Card lenders lose money when cardholders cannot pay, and they report it. Two large issuers show different results. Capital One is a US bank with a large card business. American Express reports a net write-off rate based on principal only, in its release described as a consolidated full-year figure for its card loans. The table puts the two side by side from their 2025 earnings releases.
| Full year | Capital One | American Express |
|---|---|---|
| Card net charge-off or write-off rate, 2025 | 5.12% (Domestic Card) | 2.0% (principal only) |
| The same rate, 2024 | 5.91% | 2.0% |
| Provision for credit losses, 2025 | $20.7 billion | $5.3 billion |
| Provision for credit losses, 2024 | $11.7 billion | $5.2 billion |
| Provision as a share of revenue, 2025 | 38.7% | about 7% |
| Growth in loans held for investment | +38.4%; credit card +72.0% | Not in the release |
Capital One's Domestic Card net charge-off rate was 5.12% in 2025, down from 5.91% a year earlier, while American Express's net write-off rate was 2.0% in both years. Capital One's provision for credit losses was 38.7% of its revenue, against about 7% at American Express. The provision at Capital One rose by $8.9 billion in 2025, and its loans held for investment grew by 38.4%, and the year includes the Discover business, which Capital One completed acquiring in May 2025. A provision tends to rise with the size of the loan book, so a year-on-year jump in the total says little about card quality on its own. Be careful with the comparison itself: American Express's rate is principal only and consolidated, and the releases used here do not set out Capital One's rate on the same basis. The figures describe the two businesses and are not a ranking of them.
What this lesson cannot tell you
- Real cards are more varied. Issuers use different minimum formulas, charge interest daily, apply several rates to one account and add fees. The calculator is a simplified version of one common design.
- No new spending is modelled. A cardholder who keeps using the card while repaying will take much longer, because the new purchases may carry interest as well.
- The rate is fixed in the calculator. Many card APRs are variable and tied to a reference rate, so the cost can change.
- Fees are left out. Late fees, which the model agreement says can rise after repeated lateness, annual fees and cash advance fees add to the cost.
- Issuer figures are not like-for-like. Charge-off rates differ in what they include, and card portfolios differ in who borrows.
Common mistakes
Paying only the minimum for months
The minimum is designed to be affordable, not to clear the debt quickly. The payoff time on the minimum is often many years.
Treating the grace period as permanent
It applies only when the whole balance is paid by the due date. Carry a balance and it may not apply to new purchases.
Forgetting that rates differ by balance type
Cash advances and balance transfers can have different rates, and payments above the minimum go to the highest rate first.
Comparing the monthly payment instead of the total
A lower minimum means a smaller payment now and more interest later.
Reading a bank's provision jump as a sign of weak lending
A provision rises when the loan book grows, which can happen through an acquisition. Look at rates, not just totals.
Try it yourself
1. A card has an APR of 18.25%. What is the daily periodic rate, using a 365-day year, and how much interest accrues in 30 days on an average daily balance of $2,000?
Show the working
Daily rate = 18.25% ÷ 365 = 0.05% a day. Interest = 2,000 × 0.0005 × 30 = $30.00. Interest compounds in practice, so the true figure is slightly higher when the earlier days' interest is added to the balance.
2. A balance of $1,500 at 24% APR has a minimum payment of the month's interest plus 1% of the balance. What is the minimum, and what is the balance after it is paid?
Show the working
Interest = 1,500 × 24% ÷ 12 = $30. Minimum = 30 + 1% × 1,500 = 30 + 15 = $45. New balance = 1,500 + 30 − 45 = $1,485. Only $15 of the $45 reduces the debt.
3. A cardholder buys $800 of goods on a card with a grace period and a 24% APR. What does it cost to pay it in full by the due date, and what does the next month's interest cost if only the minimum is paid and the balance is $800 at the end of the month?
Show the working
Paid in full by the due date: no interest, because of the grace period. If the $800 balance is carried for a month: 800 × 24% ÷ 12 = $16.00 of interest, and the grace period on new purchases may be lost until the balance is cleared.
4. Why does a fixed payment clear a card balance faster than the minimum payment, when the first month's payment is the same?
Show the working
The minimum is tied to the balance, so it shrinks as the balance falls. A smaller payment means less of each month's payment goes against the debt. A fixed payment stays the same, so more of the debt is cleared each month, and interest falls faster.
5. A card has a $8,000 limit and a balance of $2,400. What is the credit utilisation, and why does a lender care?
Show the working
Utilisation = 2,400 ÷ 8,000 = 30%. It shows how much of the available credit is used. The Consumer Financial Protection Bureau lists credit utilisation among the factors in a credit score, and a high figure can signal strain.
Where this is used
- A cardholder decides how much to pay each month by comparing the minimum with a fixed amount.
- A card issuer sets the rate, the minimum formula and the credit limit for each customer in line with the risk.
- An analyst studying a bank follows its card charge-off and delinquency rates as an early sign of stress.
- A regulator, in some countries including the United States, requires card statements to warn how long minimum payments will take to clear the balance.
Key terms
- Revolving credit
- Credit that can be used, repaid and used again up to a limit.
- Credit limit
- The most a cardholder may owe on the account.
- Minimum payment
- The smallest amount that must be paid by the due date to avoid being late.
- Daily periodic rate
- The daily share of the annual rate, applied to the daily balance.
- Average daily balance
- The average of the balance owed on each day of the billing cycle.
- Grace period
- The time during which no interest is charged on purchases if the balance is paid in full.
- Cash advance
- Cash borrowed against the card, often at a higher rate.
- Credit utilisation
- The balance owed as a share of the credit limit.
- Net charge-off rate
- Loans written off, less recoveries, as a share of loans.
Questions people ask
Does paying the minimum hurt my credit?
Paying at least the minimum on time avoids late-payment marks, but a high balance relative to the limit can still weigh on a score, and the interest keeps growing.
Is it better to pay early in the month?
If interest is charged on the average daily balance and there is no grace period, an earlier payment lowers the average and so the interest. If you pay in full each month, the due date is what matters.
Why are card rates so much higher than other loans?
Card debt is usually unsecured and is lent to a wide range of borrowers, so the expected loss is higher, as the previous lesson showed. Costs of servicing and rewards also play a part.
Is a balance transfer a good idea?
It can be if the new rate is lower for long enough to repay the balance, but fees and the end of any introductory rate must be counted, as in the lesson on the true cost of borrowing.
Sources and review
- Consumer Financial Protection Bureau, How does my credit card company calculate the amount of interest I owe?, for daily interest on the average daily balance, the daily periodic rate, separate rates for different balances, the grace period and how payments above the minimum are applied.
- Consumer Financial Protection Bureau, Know Before You Owe: model credit card agreement, for the standard wording on minimum payments, late fees that rise after repeated lateness, daily interest with compounding, and losing the grace period.
- Capital One Financial Corporation, Fourth quarter 2025 earnings release, for total net revenue, the provision for credit losses, Domestic Card net charge-off rate, and loans held for investment. The release says total net revenue rose 37 percent and the provision rose by $8.9 billion.
- Capital One Financial Corporation, Capital One completes acquisition of Discover, for the completion of the Discover acquisition in May 2025.
- American Express Company, Fourth quarter 2025 earnings release, for the provision for credit losses ($5.3 billion against $5.2 billion), the full-year net write-off rate (principal only) of 2.0 percent in both years, and revenues net of interest expense.
How the numbers were checked: every month of every repayment path was simulated in plain code, the fixed-payment payoff time was also checked against the closed formula for a loan, and the calculator, which runs separately, was compared with that code across a grid of inputs. The ratios for Capital One and American Express were worked from the figures in the releases cited above.