Interest is the cost you pay for borrowing money. It is usually expressed as an Annual Percentage Rate (APR), which represents the yearly cost as a percentage of the balance. Understanding how interest works can help you see why some debts cost more than others.
How compound interest works on credit cards
Credit cards typically charge interest on the outstanding balance at the end of each month. If you do not clear the full balance, interest is added. The following month, interest may be charged on a higher balance, which includes the previous month interest. This is sometimes called compound interest.
Why minimum payments can be slow
If you only pay the minimum each month, a significant portion of each payment goes toward interest rather than reducing the balance. Over time, this can mean it takes years to pay off a balance using only minimum payments.
The impact of interest rate
A higher interest rate means more of each payment goes to interest. A balance of £1,000 at 20% APR will cost significantly more in total interest than the same balance at 10% APR. This is one reason why prioritising high-interest debts can make sense mathematically.
How Ask Fin can help
High Impact Debt Reduction in Ask Fin helps you compare repayment approaches based on interest rates and balances.
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Ask Fin provides general guidance and educational support. It does not replace regulated debt advice. If you are struggling with debt, consider speaking to a qualified debt adviser or a free debt advice charity.