You Won't Believe How Much Interest the Average Credit Card Charges

It's not a small number by any means.

When it comes to borrowing money, you have options. You could borrow against the equity you have in your home, or you could take out a personal loan, which lets you borrow for any purpose.

But rather than go through the process of applying for a loan, you may be inclined to just rack up a balance on one of your credit cards instead. If you have room to go before reaching your spending limit, this might seem like the easiest option available to you.

But as convenient as it may be to simply charge expenses on a credit card and pay them off when you can, doing so could trap you in a dangerous cycle of debt. That's because credit cards are notorious for charging large amounts of interest. And if you're not careful, a lingering balance of yours could end up being more expensive than you've bargained for.

Credit card interest can be exorbitant

As of the last quarter of 2022, the average credit card interest rate was 19.07%, as per the Federal Reserve. But your credit card might charge even more -- it depends on the terms of your agreement.

Not only do credit cards tend to charge higher interest rates, but they commonly compound interest on a daily basis. And that's where a lot of consumers get tripped up.

Let's say you start out with a $500 credit card balance. Once you fail to pay it off in full, you might accrue $0.50 of interest on that $500. The day after that, you risk being charged interest not just on your $500 balance, but rather, your $500 balance plus your $0.50 of interest. And so all told, you might easily end up with a lot of interest charges -- even if your balance is relatively small.

You might also assume that carrying a credit card balance for a short period of time is no big deal. But remember, because you're accumulating interest on interest as well as principal, that two- or three-month payoff period might easily evolve into six months or longer after all is said and done.

Avoid credit card interest when possible

If you don't like the idea of losing lots of money to credit card interest, the solution is pretty simple -- don't ever carry a balance. But let's face it -- sometimes, emergencies happen, so you may have no choice but to carry a balance at one point or another.

If that happens, do your very best to pay it off quickly, even if you have to slash expenses significantly to free up the cash. At the same time, pay attention to interest rates before using a credit card to cover an unplanned bill. If you have three credit cards, but one charges 16% interest while the others charge 19% and 20%, respectively, then it makes sense to use that first card, since your balance will cost you less.

Some consumers get into financial trouble because they don't pay attention to credit card interest rates or assume they're all the same. Paying attention to the terms of your credit card agreements could stop you from making a costly mistake.