Annual Percentage Rate (APR)

Using your credit cards means you are borrowing money from your bank. The bank expects you to repay this loan. If you pay back your balance in full during the grace period (usually 21–25 days), this loan will be free. However, the bank will charge you an interest rate if you pay after the due date, which tends to be much higher than the interest you earn in your high-yield savings account.

Here is how the math works:

• Credit card companies make money when you only pay the “minimum payment.” This amount is usually just 1–2% of your total balance.
• Let’s say you owe the bank $1,000 with a 24% APR (annual percentage rate); the interest charge for one month is roughly $20 (1,000 × 24%/12).
• So if your minimum payment is $25, only $5 will go toward paying down your debt. The rest of your payment is profit for your bank.

This is why credit card debt can feel like quicksand. You may feel like you’re making progress paying back your debt every month, but the balance hardly moves unless you pay it in full.