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How are credit card interest charges compounded?
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There are a few significant perks to using credit cards as part of a well-rounded financial plan. Not only do credit cards offer a way to pay for what you need without dipping into your cash, but they also let you rack up lucrative travel or cash-back rewards while offering other benefits, like unique protections and travel and shopping discounts. So, using a credit card can make a lot of sense when you’re fully aware of the risks and are incorporating it as part of a wider plan.
However, behind these benefits is a complex system of credit card interest calculations that can significantly impact your financial well-being if you aren’t careful. While most people know that carrying a balance leads to interest charges, fewer understand the mechanics of how these charges accumulate over time. But that compound interest — which is the interest charged on both the principal balance and previously accumulated interest — is precisely what makes credit card debt particularly challenging to manage.
Unlike simple interest, which is calculated only on the principal amount, compound interest creates a snowball effect that can cause debt to grow exponentially if left unchecked. As a result, understanding how credit card companies calculate and compound the interest on your balance is crucial to keeping your credit card debt from spiraling out of control.
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How credit card interest charges are compounded
Credit card companies typically calculate interest charges using a daily periodic rate, which is the annual percentage rate (APR) divided by 360 or 365 days, depending on the issuer. This daily rate is then applied to your average daily balance, creating a compounding effect that occurs not just monthly, but daily.
The process begins when you carry a balance beyond your grace period — which varies by issuer but is typically at least 21 to 25 days. Each day, the card issuer multiplies your current balance by the daily periodic rate to determine that day’s interest charge. This new interest amount is then added to your balance, becoming part of the principal that will be used to calculate the next day’s interest charges. This daily compounding means that you’re effectively paying interest on your interest, creating an accelerating cycle of debt accumulation.
To illustrate this concept, consider a credit card with an 18% APR (which equates to a daily periodic rate of 0.0493%). If you carry a $2,000 balance, the first day’s interest charge would be approximately $0.98. This amount is then added to your balance, so the next day’s interest calculation is based on $1,000.98, and so on. Over a month, this daily compounding can add significantly more interest than if it were calculated just once monthly.
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How to cut credit card interest charges
Given how quickly credit card interest charges can compound, it’s important to find ways to cut down on interest charges if you’re carrying a balance. There are a few ways to do that, including:
Transferring your balance
One effective way to reduce interest charges is by transferring your balance to a credit card that offers a low promotional rate. Many credit card issuers offer 0% APR periods on balance transfers that typically last from 12 to 21 months. By transferring your high-rate credit card debt to a card with a 0% introductory rate, you can temporarily halt the compounding of interest, allowing all of your payments to go toward reducing the principal balance. However, it’s important to factor in the balance transfer fees (which are usually 3% to 5% of the transferred amount) to ensure that you’re saving enough to justify the extra fee.
Enrolling in a debt management program
Debt management programs, which are offered through credit counseling agencies, can provide a structured approach to dealing with credit card debt. When you enroll in this type of program, the experts will typically negotiate with your creditors to lower your current credit card rates and create a manageable repayment plan. This can help you pay less in interest and avoid the compounding interest trap that comes with paying much higher interest rates.
Utilize your debt consolidation options
When you consolidate your debt, you combine multiple credit card balances into a single loan, ideally with a lower interest rate. Common consolidation options include personal loans, home equity loans or home equity lines of credit (HELOCs) — though there are also debt consolidation-specific loans and programs that can also be used for this purpose.
Personal loans typically offer fixed interest rates and structured repayment terms, making them more predictable than credit card debt. Home equity products also typically come with lower interest rates due to being secured by your property, though they carry the risk of losing your home if you default. While consolidation can help you save on interest, it’s still crucial to compare the total cost of the new loan, including fees and interest, against your current credit card payments to make sure you’re saving money.
The bottom line
Understanding how credit card interest charges are compounded is the first step toward managing your debt effectively. By recognizing the impact of daily compounding and exploring strategies like balance transfers, debt management plans and debt consolidation loans, you can significantly reduce your interest charges. You’ll need to take proactive steps, though, and remain disciplined in your repayment efforts, ensuring that your credit cards remain a useful tool rather than a source of financial stress.
President-elect Donald Trump’s criminal conviction in state court remains on the books Monday, after a New York judge rejected an effort by Trump to have the case tossed based on a landmark Supreme Court ruling.
Justice Juan Merchan found that a July Supreme Court ruling granting Trump presidential immunity for official acts did not preclude a jury from finding him guilty after a criminal trial this spring.
Merchan wrote that evidence shown at trial pertained “entirely to unofficial conduct.”
This is a developing story and will be updated.
As unexplained drone sightings along the East Coast trigger investigations and demands from officials for more information, a wave of online speculation has filled the void as amateur sleuths seek to solve the mystery themselves.
One Facebook group called “New Jersey Mystery Drones – let’s solve it” has surged to over 73,000 members in recent days, becoming a hub for users to share their drone sightings and speculate on the source of the mysterious activity.
George Gary, a New Jersey resident who joined the Facebook group, told CBS News that he was sitting in his car in Moorestown when he saw what he said were “multiple drones” in the sky. “I’m honestly not sure what’s behind them,” he said, speculating that it could be connected to government activity. “I’m really curious to find out.”
New Jersey resident Vanessa Grierson, who also said she has seen drones, told CBS News she joined the Facebook group to find out what others were seeing. “It’s alarming that there are still no answers,” she said.
Across social media, users have shared theories that range from foreign interference to UFOs to hobbyist activity.
The FBI and Department of Homeland Security issued a joint statement last week saying there is “no evidence at this time” that the reported drone sightings pose a threat to national security or public safety, or have any foreign connection.
But state and local leaders have been pushing for more information and a stronger response.
New Jersey Gov. Phil Murphy said Sunday he is urging federal authorities to allocate more resources to investigate the sightings, while New York Gov. Kathy Hochul announced that a drone detection system is being deployed in the state.
In some cases, people mistake planes for drones
The number of drones flying over the East Coast and the identity of those behind the activity remain unclear. White House national security spokesperson John Kirby said Monday that the FBI has received about 5,000 tips of reported drone sightings in the last few weeks, “about 100 of which they felt needed to be followed up on.”
Authorities say many of the reported drone sightings could be aircraft or helicopters operating from the region’s numerous airports, as residents increasingly turn their attention to the skies in search of answers.
New Jersey Sen. Andy Kim said he went on patrol with police on Thursday night to find out more about the drones. In a lengthy X thread, Kim said he “concluded that most of the possible drone sightings that were pointed out to me were almost certainly planes.”
Kirby said many other reports were determined to be “a combination of lawful commercial drones, hobbyist drones and law enforcement drones.”
In addition, unrelated videos have sparked confusion. On Friday, a video was widely shared and said to show a mysterious drone seemingly “shooting” at the ground. However, CBS News traced the footage to a military training exercise at Joint Base McGuire-Dix-Lakehurst.
People have also shared old videos from different contexts. One widely shared clip, allegedly showing drones over New York, is at least four years old.
Officials respond
Rep. Mike Waltz, a Republican from Florida who is President-elect Donald Trump’s pick for national security adviser, said on “Face the Nation with Margaret Brennan” that the lack of information highlights lapses in authority between local law enforcement and federal agencies like the Department of Defense and Department of Homeland Security.
“I think Americans are finding it hard to believe we can’t figure out where these are coming from,” Waltz said. “It’s pointing to gaps in our capabilities and in our ability to clamp down on what’s going on here. And we need to get to the bottom of it.”
Democratic Sen. Cory Booker of New Jersey said there is a “growing sense of uncertainty and urgency across the state” despite statements from federal investigators assuring residents that the drones do not pose public safety threats.
“As such, I urge you to share any relevant information about these drone sightings with the public,” Booker said. “Without transparency, I believe that rumors, fear, and misinformation will continue to spread.”
Shooting down drones?
Some social media users have suggested that they plan to shoot down the drones if they veer too close to their homes. President-elect Trump also suggested shooting down the drones, though he did not clarify who should take such action.
However, shooting down a drone is a federal crime.
The Federal Aviation Administration classifies drones as aircraft, meaning damaging or destroying them is a violation of the Aircraft Sabotage Act.
Beyond legal risks, firing at drones poses a serious safety hazard and could lead to injuries.
Washington — President-elect Trump is meeting with TikTok CEO Shou Chew on Monday at his Mar-a-Lago estate, according to sources familiar with the meeting.
The news was first reported by CNN.
A spokesperson for TikTok did not immediately respond to a request for comment.
At a news conference earlier Monday, Trump had warm words about TikTok and its near-term future.
“We’ll take a look at TikTok. You know, I have a warm spot in my heart for TikTok, because I won youth by 34 points. And there are those that say that TikTok has something to do with that,” Trump said when asked about how he would stop a ban. Harris won 54% of voters under 30, but Trump made inroads.
During his first term in the White House, Trump tried to ban the app.
President Biden earlier this year signed into law a bill passed by Congress requiring TikTok and its Chinese parent company, ByteDance, face a Jan. 19 deadline to cut ties or be banned in the U.S. The companies have tried to delay the deadline pending a Supreme Court review, but a federal appeals court, which upheld the law, denied the request last week. The companies asked the Supreme Court on Monday to temporarily pause the law.
“A modest delay in enforcing the Act will create breathing room for this Court to conduct an orderly review and the new Administration to evaluate this matter — before this vital channel for Americans to communicate with their fellow citizens and the world is closed,” the emergency application said.
The filing asked the Supreme Court to make a decision on the request by Jan. 6 so ByteDance and TikTok can “coordinate with their service providers to perform the complex task of shutting down the TikTok platform only in the United States” if the justices decline.
A 90-day extension could be granted if a sale is in process by the deadline. But TikTok has argued that a sale is unfeasible and the Chinese government opposes the sale of the algorithm which powers the app.
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