• Interest becomes compounded on a credit card, or any loan, when the interest accrued in a given month is not paid off. In the event that interest is not paid off, the interest is added to the principal and will itself be charged interest when it is calculated at the end of the next billing cycle. If interest is allowed to compound on a credit card, it may never be paid off, leading you to the danger of being forever in debt. There are, however, ways to avoid these dangerous, debt-riddled situations.
  
  

Calculating Compound Interest

• Credit card companies typically calculate interest based on the average daily balance over the past billing cycle (typically 30 days). For example, if someone had an average daily balance of $1,000 and was being charged 12 percent APR (annual percentage rate), the interest at the end of a 30-day cycle would be $9.86 (12 percent APR divided by 365 for a daily interest rate of 0.03288 percent, multiplied by the 30-day period to equal 0.9683 percent interest for the month, and finally multiplied by the average daily balance of $1,000 = $9.86). The total due on the account would then be $1,009.86. If less than $9.86 was accepted as a minimum payment, the remainder would carry over and the interest would be more the next month.
  
  

Additional Fees

• If a payment is made late or the account limit is exceeded in a given payment cycle, fees are typically assessed. These fees may be more than $30 each. When these fees are added to the account, they too increase the balance due on the card and the interest along with it. For instance, let's say in the above example that the minimum due was not paid on time. The day after the due date a $30 fee is added to the balance, along with the original $1,000 principal and last month's $9.86 interest, for a total of $1,039.86. If that were subject to the same interest rate (12 percent), the interest due for this 30-day period would be $10.36, leaving you with an account balance of $1,050.22.
  
  

Avoid Compounding Interest

• Pay off the balance and part of the principal on time during each payment cycle. You can check to be sure your payment covers the interest by checking your monthly statement and comparing the minimum amount due to the interest charged on your balance for that month. Be careful not to incur any late charges or over-limit fees on your card. Also note that while you are carrying a balance, any charges you make will be immediately added to your balance and begin accruing each day.
  
  

Calculating Your Interest and Payoff Schedule

• To get control of your credit card debt, it is helpful to pay more than just the minimum on your statement, even if it does exceed the interest accrued on your account. By creating a payment schedule, you can know in advance how much it will take to pay off your credit card in a given amount of time, and what day you will pay off your debt. For example, if you had a $1,000 balance at 12 percent APR and wanted to pay it off in one year, you would need to make a monthly payment of $88.85. If, however, you could afford only $75 per month, it would take you 15 months to pay off your balance. See the "Credit Card Calculator" link below in the "References" section.
  
  

Breaking the Debt Cycle

• As you can see, it is possible to build up your debt quickly beyond your ability to pay off even the interest alone. The example figures are very conservative. The average American has nearly $10,700 in credit card debt, according to the founder of Consolidated Credit Counseling Services, Inc. Interest rates are typically higher than 12 percent APR; some can be twice that. Unless your payments can exceed the interest you pay, you will never pay off the balance of the loan. If it is not possible for you to pay off much more than the interest on your credit cards, you should consider credit counseling services to help negotiate down your rate. See the "Credit Counseling" link below in the "Resources" section below.