Consumers Frequently Encounter Credit Card "Interest Rate Ambushes" - How Is Revolving Interest Calculated?

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“I clearly make my payments on time every month, so why does it feel like I can never pay off this debt?” This is Guangdong consumer Ming’s confusion when checking his credit card statement. Over the past few months, he relied on the “minimum payment” to manage his funds, but inadvertently accumulated over 1,600 yuan in interest. Even the amounts he has already paid off are still accruing interest from the bank.

This is not an isolated case. On third-party complaint platforms [Download Black Cat Complaint App], many banks’ credit cards are frequently complained about due to “circular interest calculation” issues. Consumers only realize after falling into the trap that they are paying for rules they do not fully understand.

“Circular interest calculation” is a common interest calculation method in the credit card industry. If cardholders only pay the minimum amount, the bank will calculate interest daily on the unpaid portion from the date of the transaction, and the interest will continue to compound. Currently, most banks calculate interest at a daily rate of 0.05%, which translates to an annual rate of about 18.25%. Long-term use of the minimum payment can easily push the effective annual interest rate much higher. Many consumers refer to this as the “interest assassin.”

Is circular interest calculation a standard industry practice? How does the law define it? How can consumers identify the “invisible killers” in their credit card bills? A reporter from First Financial conducted an investigation.

The “Invisible Growth” in Bills

Last year, Ming opened a credit card with a South China-based joint-stock bank. Due to frequent spending, he often chose the minimum payment on the due date, with the remaining balance paid in installments. But recently, he carefully calculated and found that in just a few months, he had accumulated 987.38 yuan in purchase interest, 668.04 yuan in installment interest, and 20 yuan in late fees, with total payments exceeding his expectations. After consulting customer service, he learned that some amounts already paid were still being charged interest.

Industry insiders call this interest calculation method “full amount interest.” For example, for a 10,000 yuan purchase, if the cardholder does not pay the full amount by the due date—even if only 200 yuan remains unpaid—the bank will still use 10,000 yuan as the basis, calculating interest daily from the date of the transaction.

Besides full amount interest, the compound interest mechanism further increases the cost of credit card overdrafts.

Another Guangdong consumer, Tengteng (pseudonym), opened a credit card with a state-owned major bank in 2022, initially with a repayment amount of only 18,000 yuan. Due to repeatedly choosing the minimum payment, after 15 months, the amount owed increased to 23,400 yuan, with interest and fees totaling 5,437.4 yuan.

Tengteng told the reporter: “The bank adds the daily interest of 0.05%, overdue late fees, and cash withdrawal fees into the principal, and calculates interest with compound interest monthly. As the base amount keeps growing, by the 15th month, the repayment amount has increased from the original 18,000 yuan to 23,400 yuan.”

The combination of these two methods is called “circular interest calculation.” Wang Pengbo, a senior analyst at Broadcom Financial Industry Analysis, pointed out that circular interest calculation refers to the practice where, if the cardholder does not fully settle the bill before the due date and only makes the minimum payment, the bank calculates interest daily from the transaction date on the full amount and continues to roll over. This is the common interest calculation mode used by domestic credit card industry.

This method directly raises the overall borrowing costs for consumers. Currently, most banks charge overdraft interest at a daily rate of 0.05%, which equates to an annual rate of about 18.25%, compounded monthly. Long-term use of the minimum payment, under the effect of compounding, can significantly increase the effective annual interest rate.

Compared to complex interest rules, the information display and risk warnings related to credit cards are often insufficient. Consumers often find it difficult to clearly understand the interest composition and calculation methods before and after choosing installment plans.

Some respondents provided screenshots showing that a certain credit card repayment page defaults to “minimum payment,” with only small print indicating daily and annualized interest rates, but key mechanisms like compound interest and full amount interest are not mentioned.

(An image of a credit card repayment page from a certain bank. Provided by the respondent)

Some users also reported that they were not clearly reminded before interest was deducted, and only realized the accumulated fees later. When trying to communicate with the bank, they found that the bill did not specify the calculation method, and customer service often gave vague answers or lacked understanding of the interest rules.

To verify this, First Financial tested several credit card repayment platforms on March 14. The results showed that on the minimum repayment pages, most banks only listed the daily interest rate, without further explanations of key rules like compound interest and full amount interest. Some banks provided secondary windows with explanations stating that choosing the minimum payment would not enjoy interest-free benefits. Even if the next month’s bill is paid in full, the bank would still calculate interest using the full amount interest method.

For example, on a certain joint-stock bank’s credit card page, if a 1,000 yuan purchase is made on May 25 and the minimum repayment of 100 yuan is due on June 16, interest from May 25 to June 1 is calculated on 1,000 yuan. From June 17 until the next billing date, interest is calculated on 900 yuan. The total interest would be 18.2 yuan.

If the cardholder continues to make only the minimum payment in the next billing cycle, the interest calculation continues with the same mechanism, applying full interest on the remaining principal until it is fully paid off.

(An image source: Credit Card App of a certain joint-stock bank)

The First Financial reporter found on third-party complaint platforms that this issue is quite common. Many banks’ credit cards have been complained about for circular interest calculation, including state-owned banks and joint-stock banks. Complaints focus on high fees, opaque interest charges, and lack of timely notifications before deductions. Multiple complaints show that the actual annualized interest rate for circular interest can exceed 20%, earning the nickname “interest assassin” among consumers.

“Multiple Layers” of Overdraft Fees on Credit Cards

Complaints about credit card interest calculation have been persistent. The First Financial investigation found that consumers generally have a vague understanding of how interest is composed, which is a main reason for falling into traps. From the fee structure, credit card interest mainly includes overdraft interest and late fees, with differences in calculation methods and standards among banks further complicating consumer understanding.

Overdraft interest is the most basic fee for credit cards. Recent visits to several banks, including Minsheng Bank, China Merchants Bank, CITIC Bank, and China Construction Bank, revealed that when cardholders do not fully repay but meet the minimum payment requirement, most adopt the circular interest calculation mode.

For example, Minsheng Bank’s customer service told the reporter that if the customer does not make a full repayment on time, all transactions from the date of entry will accrue interest at a daily rate of 0.05% until the day before repayment. China Merchants Bank’s customer service also explained that interest is calculated on all transactions from the date of entry at a daily rate of 0.05%. The “entry date” usually refers to the date when the merchant and bank settle the transaction; domestic transactions are generally settled the next day, while overseas transactions may be delayed due to merchant settlement times.

Only some large banks use differentiated interest calculation methods. For example, the Industrial and Commercial Bank of China (ICBC) app shows that their “Super Benefit” series credit cards use partial interest calculation: if the cardholder only repays part of the amount during the repayment period, interest is calculated on the unpaid portion, and overdraft interest is discounted by 40% for transactions that do not meet interest-free conditions.

Besides overdraft interest, if the cardholder does not pay the minimum amount before the due date, late fees are also charged. Different banks have varying standards. For example, Ping An Bank’s customer service explained that if the overdraft principal is less than 20 yuan or 3 USD, the late fee is based on the overdraft amount; if it exceeds 20 yuan or 3 USD, a 5% late fee on the unpaid minimum amount is charged, with a minimum fee of 20 yuan or 3 USD. China Construction Bank’s customer service said they charge a late fee of 5% on the unpaid minimum amount, billed per occurrence. Notably, in some cases, late fees and interest accrue simultaneously—if the cardholder does not pay the minimum or the full amount, they must pay interest according to the interest rules and an additional late fee.

To ease the burden of interest from short-term missed payments, the industry has generally implemented a “grace period” and “tolerance” mechanisms.

On May 31, 2024, the China Banking Association issued a revised “Self-Regulatory Convention for the Chinese Bank Card Industry (2024 Edition),” advocating for banks to provide “grace period” and “tolerance” services. Tests show that most banks have adopted these mechanisms, such as offering a three-day extension after the repayment date and allowing amounts under 100 yuan to be considered as fully paid.

For example, China Merchants Bank’s customer service said that cardholders automatically enjoy a three-day grace period without applying. If the bill amount is less than 100 yuan or 15 USD, no interest or late fees are charged. Minsheng Bank also offers a three-day grace period; for instance, if the last repayment date is the 3rd of each month, the customer can complete repayment by the 6th at 5 pm.

Why is this industry practice?

Faced with external doubts about the “full amount interest” and “compound interest” models, a deeper question is: why do banks generally follow this interest calculation method?

Senior credit card industry expert Dong Zheng pointed out that most credit cards on the market adopt full amount interest (i.e., interest is calculated on the entire owed amount if not fully repaid). While there is room for improvement, users must accept and comply with this before any change.

Wang Pengbo told First Financial that, from a practical standpoint, circular interest calculation is a mature business model: on one hand, banks gain stable income to cover risks and costs; on the other hand, it provides users with the flexible option of “minimum payment” to meet short-term liquidity needs. This dual compatibility allows the model to persist in the market.

First, it is driven by banking logic. A bank credit card professional told the reporter that the profitability of credit card business includes installment income, interest income, and other revenue. The interest income from circular interest is a key source for covering funding costs, operational expenses, and profit.

“The bank has funding costs, and if the customer does not make full repayment on time, the corresponding fees naturally need to be borne by the customer,” he said.

Second, the law does not explicitly prohibit it.

From a compliance perspective, Wang Pengbo analyzed that as long as banks fully disclose the interest rules beforehand, clarify the interest rates, and the annualized rate remains within regulatory limits, circular interest calculation itself is not illegal. The issue mainly lies in implementation—if the information display is not prominent enough or user understanding is inadequate, disputes are more likely.

In fact, there has been judicial debate over the legality of credit card interest calculation methods. In 2021, the Supreme People’s Court solicited opinions on the “Provisions on Several Issues Concerning the Trial of Civil Cases of Bank Card Disputes,” which proposed two options: one aimed to fundamentally deny the legality of full amount interest; the other, more moderate, suggested that if 90% of the amount has been repaid, interest could be calculated on the unpaid portion. No formal judicial interpretation has been issued yet, so industry practices continue.

The Key is in Information Disclosure

What are the main legal disputes currently surrounding circular interest calculation?

First is the dispute over high interest fees. Using a daily rate of 0.05%, the annualized interest rate for credit card overdraft is 18.25%. When compounded with late fees and other charges, the actual cost could be even higher, far exceeding the 4% one-year loan market quotation rate (LPR).

Guo Lei, a lawyer at Jinzhou (Shenzhen) Law Firm, told First Financial that in judicial disputes involving circular interest, courts mainly rely on the “Provisions on Several Issues Concerning the Trial of Civil Cases of Bank Card Disputes” issued by the Supreme People’s Court, and follow principles of fairness and good faith to review and adjust excessively high fees.

Regarding the excessive stacking of compound interest and late fees, Guo Lei said this is a key focus of judicial review. According to Article 2 of the “Provisions,” courts consider factors such as financial regulatory rules, the amount and duration of unpaid amounts, the degree of fault of both parties, and actual losses of the bank. In practice, courts generally set an upper limit of 24% annual interest rate for total fees (including interest, compound interest, late fees, etc.).

Second is the validity of full amount interest clauses as standard contract terms.

Lawyer Wang Guanfu from Guangdong Jiade Xin Legal Service Center pointed out that banks usually mark full amount interest clauses with underlines or bold text to ensure cardholders notice the relevant content. This marking is generally considered to meet the obligation of prompt and clear explanation of standard terms, thus supporting the validity of the full amount interest clause as part of the contract.

However, he emphasized that even if the clause is included, if it unjustly exempts or reduces the bank’s responsibilities, or imposes excessive burdens on the cardholder, or limits or excludes the main rights of the cardholder, it may still be deemed invalid.

Article 2 of the “Provisions” states that if the issuing bank fails to fulfill the obligation to prompt or explain the collection of interest, compound interest, fees, or late fees when entering into the card agreement, leading to the cardholder’s lack of awareness or understanding, the court should support the cardholder’s claim that the clause is not part of the contract or is not binding.

Industry experts believe that the key to resolving disputes in the circular interest field lies in strengthening information disclosure. Wang Pengbo suggests future improvements should focus on three aspects: first, unify the interest calculation standard to only accrue on unpaid principal; second, disclose the interest calculation method and true annualized cost in a more straightforward manner; third, banks should implement differentiated pricing based on user credit profiles to balance operational needs and consumer rights.

(Ming, Tengteng are pseudonyms; intern Zhu Lingjie also contributed to this article.)