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

“I clearly make my payments on time every month, so why does it feel like I can never pay off this debt?” This is the confusion Guangdong consumer Ming experienced 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 continue to accrue interest from the bank.

This is not an isolated case. On third-party complaint platforms, multiple banks’ credit cards have been frequently reported by consumers 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.

The so-called “circular interest calculation” is a common interest charging 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 transaction, and the interest will continue to compound. Currently, most banks charge a daily interest rate of 0.05%, equivalent to an annualized rate of about 18.25%. Long-term use of the minimum payment option can easily push the effective annual interest rate higher. Many consumers refer to this as the “interest assassin.”

Is circular interest calculation the industry standard? How does the law define it? How can consumers identify the “invisible killers” in their credit card bills? A Financial Times investigation explores these questions.

“Invisible Growth” in the Bill

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 due dates, 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 repayments exceeding his expectations. After consulting customer service, he learned that some amounts already paid off were still being charged interest.

Industry insiders call this interest calculation method “full amount interest.” For example, with 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 and calculate interest daily from the transaction date.

In addition to full amount interest, the compound interest mechanism further increases the cost of overdrawing on credit cards.

Another Guangdong consumer, Teng Teng (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 continuous minimum payments, after 15 months, the outstanding amount increased to 23,400 yuan, with interest and fees totaling 5,437.4 yuan.

Teng Teng explained to the reporter that during interest calculation, the bank rolled daily interest at 0.05%, overdue penalties, and cash withdrawal fees into the principal, applying compound interest monthly. As the base amount grew, by the 15th month, the repayment amount had increased from the initial 18,000 yuan to 23,400 yuan.

These two methods combined are called “circular interest calculation.” Wang Pengbo, a senior analyst at Broadcom Financial Industry Analysis, states that circular interest calculation refers to the practice where, if the cardholder does not fully settle the bill before the due date and only pays the minimum, the bank calculates interest daily from the transaction date on the full amount and continues to roll over the interest. This is the common interest calculation model used by domestic credit card industry.

This method directly raises the overall borrowing cost for consumers. Currently, most banks charge a daily interest rate of 0.05%, translating to an annualized rate of about 18.25%, compounded monthly. Once consumers adopt the minimum payment long-term, the effective annual interest rate can be significantly increased due to the compound interest effect.

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.

Screenshots provided by interviewees show that some credit card repayment pages default to “minimum payment,” with only small print indicating daily and annualized interest rates, while key mechanisms like compound interest and full amount interest are not mentioned at all.

[Image: Credit card repayment page from a bank. Provided by interviewee.]

Some users also report that they were not clearly reminded before interest was deducted, and only realized the accumulated fees later. When attempting 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, the Financial Times tested several credit card repayment platforms on March 14. Results showed that on the minimum payment page, most banks only listed the daily interest rate, without further explanation of key rules like compound interest or 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 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 is calculated on 1,000 yuan from May 25 to June 1. From June 17 until the next billing date, interest is calculated on 900 yuan. The total interest amounts to 18.2 yuan.

If the cardholder continues to pay only the minimum 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.

[Image: Source: Credit card app from a joint-stock bank.]

The Financial Times found on third-party complaint platforms that this issue is quite common. Many banks, including state-owned and joint-stock banks, have been reported for circular interest calculation problems, with complaints focusing on high fees, opaque charges, and lack of timely notification before deductions. Multiple complaints indicate that the actual annualized interest rate exceeds 20%, earning the nickname “interest assassin” among consumers.

“Multiple Gates” of Overdraft Fees on Credit Cards

Complaints about credit card interest calculation have remained high. The investigation reveals that consumers generally have a vague understanding of how interest is composed, which is a main reason they fall into traps. From the fee structure, credit card interest mainly includes overdraft interest and late fees, with different banks applying varying calculation methods and standards, 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, show that when the cardholder does not pay the full amount but meets the minimum payment requirement, most adopt the circular interest model.

For example, Minsheng Bank’s customer service told the reporter that if the customer does not pay the full amount 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 posting date at a daily rate of 0.05%. The “posting 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” 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 transactions that do not meet interest-free conditions enjoy a 60% discount on overdraft interest.

[Image: ICBC credit card app showing interest calculation method.]

In addition to overdraft interest, if the cardholder does not pay the minimum amount before the due date, late fees will also be 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% fee on the unpaid minimum amount is charged, with a minimum 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, both interest and late fees accrue simultaneously—if the cardholder does not pay the minimum or full amount, they must pay interest according to the rules and also bear the late fee.

To ease the burden of short-term missed payments, the industry has generally adopted a “tolerance” mechanism.

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

For example, China Merchants Bank’s customer service said that cardholders automatically enjoy a three-day grace period without applying; if the unpaid amount is less than 100 yuan or 15 USD, no additional interest or late fee will be charged. Minsheng Bank also offers a three-day grace period, for instance, if the last payment date is the 3rd of each month, the customer can complete the payment by 5:00 pm on the 6th.

Why is this industry-wide practice accepted?

Faced with external doubts about the “full amount interest” and “compound interest” models, a deeper question arises: why are these interest calculation methods so widely adopted by banks?

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

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

Primarily 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 revenues. The interest from circular interest calculation is a key source for covering funding costs, operational expenses, and profit.

“Banks have funding costs themselves, and if customers do not repay on time in full, they naturally bear the related costs,” the person said.

Secondly, 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 often lies in implementation—insufficient information display and inadequate user understanding—these are the main areas of controversy.”

In fact, there has been debate in the judicial field about 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,” proposing 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. To date, no formal judicial interpretation has been issued, allowing industry practices to continue.

Key issue: information disclosure.

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

First is the high-interest fee dispute. Using a daily rate of 0.05%, the annualized interest rate on 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 Prime Rate (LPR).

Guo Lei, a lawyer at Jinzhou (Shenzhen) Law Firm, told the Financial Times that in judicial disputes over 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, adhering to principles of fairness and good faith, and will review and adjust excessively high fees accordingly.

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 will consider financial regulations, the amount and duration of unpaid amounts, the fault of both parties, and actual losses of the bank. In practice, courts generally set an upper limit of 24% annual interest rate for combined fees (interest, compound interest, late fees, etc.).

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

Lawyer Wang Guanfu from Guangdong Jiade Xin Law Firm 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 notice and explanation obligations for standard terms, thus supporting the validity of the full amount interest clause.

However, he emphasized that even if the clause is included, if it unjustly exempts or reduces the bank’s responsibilities, or imposes unreasonable burdens on 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 interest, compound interest, fees, or late fees in the card agreement, leading to the cardholder’s lack of awareness or understanding, and the cardholder claims the clause is not part of the contract or is not binding, courts should support this.

Industry experts believe that improving information disclosure is the key to resolving disputes over circular interest. Wang Pengbo suggests future improvements should focus on three aspects: first, standardizing interest calculation to only apply to unpaid principal; second, clearly disclosing the interest calculation method and true annualized cost in an understandable way; third, banks should implement differentiated pricing based on user credit to balance operational needs and consumer rights.

(Ming, Teng, both pseudonyms; intern Zhu Lingjie also contributed to this article.)

(This article is from First Financial)