Many people know that credit card interest rates are high. But very few people know how this interest is actually calculated. As a result, many times people do not understand why their outstanding balance is increasing so quickly. To understand this issue, it is first necessary to clarify a concept. Credit card interest is usually shown as an “annual rate”, which is called Annual Percentage Rate or APR. Suppose your card interest rate is 36 percent per year. Now the question is, does this 36 percent add up at once? No. It is actually calculated on a daily basis. Suppose, you have an outstanding balance of 10,000 taka and you have not paid the full bill. Now the 36 percent annual interest is divided daily. That is, 36% ÷ 365 ≈ about 0.098 percent per day. That means that about 9.8 taka of interest is being added to your 10,000 taka every day. Now many people mistakenly think here, “Okay, very little is being added every day.” But the real point is not here. The real point is “compounding” or compound interest. On the first day, your interest was 9.8 taka, so your outstanding balance was 10,009.8 taka. The next day, the interest will be calculated on this new amount. That is, again 0.098 percent, but this time on a slightly higher amount. In this way, the interest is added to the principal amount every day to create a new principal, and the next day's interest is calculated on that new principal. The following formula is useful to explain this concept: A = P{1+(r/n)}^nt Here, A = Total outstanding after a certain period P = Principal amount r = Annual interest rate n = How many times a year is the interest compounded (almost daily on a credit card) t = Time (in years) Now let's look at a simple real-world example. Suppose you have an outstanding balance of 10,000 taka and have not made any payments for 3 months. You might think that the interest will be 900 taka in 3 months (the 3-month portion of 36%). But in reality, it is a little more, because the daily interest is added to the principal amount and increases. As a result, your outstanding balance at the end of 3 months may not only be 10,900 taka, but may be more. Another important point is that in many cases, interest also starts accruing on new purchases if you have previous outstanding balances. That is, you are paying interest not only on the old debt, but also on new expenses. Now you need to understand why paying only the minimum payment increases the problem. When you pay the minimum payment, a part of your money goes to paying interest, and a very small part is reduced to the principal. As a result, interest starts accruing on the remaining money again. The longer this cycle continues, the slower your debt will decrease. Smart users keep this figure in mind. They know that interest is added every day, so the best strategy is to reduce the outstanding balance to zero as quickly as possible. If it is not possible to pay the entire amount at once, then at least make a large payment, so that the principal is reduced quickly and the subsequent interest amount is also reduced. Ultimately, credit card interest is not a mysterious thing. It's a mathematical process that works against you every day—if you don't get it under control. The question is, are you making decisions with this math in mind, or are you unknowingly getting caught up in compound interest?