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Credit card interest rates

Learn how credit card interest rates work so you can find a card that suits your needs.

When you use a credit card, you are essentially borrowing money from the account’s credit limit. So just like any other loan, interest may be charged on the balance. How and when this interest is charged can have a huge impact on what you pay for the use of your credit card.

To make sure your credit card works for you, here you will find answers to the most common questions about interest, including the different rates that may apply and when they are charged. We also look at how to compare credit card interest rates and take advantage of interest-free days so you can avoid interest charges.

What are credit card interest rates and how do they work?

Interest rates are a type of fee that are charged when you borrow money. With credit cards, interest rates are calculated as a percentage of your balance and shown as an annual or per annum (p.a.) figure. For example, a card could have an interest rate of 9.99% p.a. or 21.99% p.a.

Most credit cards also have different interest rates for different types of transactions, with the most common being a purchase rate and a cash advance rate. You can learn more about different types of interest rates below.

How is credit card interest calculated?

The interest rate on credit cards is normally shown as an annual figure. However, most credit card companies calculate interest on a daily basis and then add the charges to your account at the end of each statement period. To determine your credit card interest amount, your daily outstanding balance is multiplied by the daily interest rate on your credit card. These daily calculations are then added together at the end of the statement period to obtain the total interest due. The daily interest rate is calculated by dividing the p.a. interest rate by 365.

Compound interest costs

The way credit card interest is charged is known as “compound interest” because it is calculated daily. This means you can end up paying interest on your interest charges. The good news is you can cut down on interest costs any time you make a repayment, because that also affects the daily interest calculation.

Types of credit card interest rates

ccf-interest-woman-250x250Here are the most common types of interest rates you find on credit cards:

  • Purchase interest rate. This is the interest you are charged when you use your credit card for making payments in retail outlets or online.
  • Cash advance interest rate. This is the interest rate charged when you use your credit card for withdrawing cash from ATMs or cash equivalent transactions, like buying gift cards or gambling.
  • Balance transfer interest rate. This is the interest rate you are charged when transferring an existing credit card debt to a new card.
  • Promotional interest rate. Many credit card companies offer new customers a promotional interest rates for purchases and/or balance transfers. This promotional interest rate is only available for a limited time, with the standard interest rate applying after that. For example, a card may offer you 0% interest on balance transfers for an introductory period. If you don’t pay off the balance transfer during that period months, the standard rate for balance transfers will apply to the debt.

Even the smallest difference in credit card interest rates can have a huge impact on your account costs. So when you are looking for a new card, make sure you compare both the standard and promotional interest rates to help you find one that suits your needs.

Comparing credit card interest rates

To show you how important it is to compare interest rates, let’s say you have a balance of $1,000 on a credit card with an interest rate of 20.99% p.a. If you only make monthly payments of $50 on this debt, it will take you around 2 years to pay off your balance and cost you about $212 in interest.

On a credit card with an interest rate of 15.99% p.a., it will still take around 2 years to pay off your balance but will cost you $153 in interest. That is a saving of $53, compared to the card with a higher rate, which is basically another monthly repayment. The bigger the difference in rates, the greater the potential savings will be.

What else do I need to know?

As well as interest rates, make sure you consider the following when you are looking for a new credit card:

  • Interest-free days. Many credit cards offer up to a certain number of interest-free days on purchases when you pay your account balance in full by the due date on your statement. For example, up to 55 days interest-free. This gives you a way to avoid interest charges for spending on your credit card.
  • 0% interest rate offers. If you get a credit card with a promotional 0% interest rate, it may only apply for certain types of transactions. For example, you could get 0% interest on balance transfers for 12 months but still have to pay the standard variable interest rate for purchases. There is also a range of credit cards that offer introductory 0% interest rates on both purchases and balance transfers, although standard rates apply at the end of the promotional period.
  • Annual fee. Most credit cards charge an annual fee, which can also add to your account balance. Remember to factor this cost in when you are comparing credit cards and also when budgeting for interest cost and repayment.
  • Other features. Many credit cards offer complimentary extras such as insurance or rewards, which may help offset the cost of the annual fee and interest charges. Just remember to weigh the value of the benefits against potential costs so you can decide if a card is worth it based on your spending habits and goals.

Credit card repayment and interest calculator

You can use this calculator to figure out how much you’re paying on your current card, how much you could save with a low rate card, or how to plan your repayments and save yourself the most money.

*Whilst every effort has been made to ensure the accuracy of this calculator, the results should only be used as an indication. They are neither a recommendation nor an eligibility test for any product and should not be construed as financial advice, investment advice or any other sort of advice.

Compare credit cards

Name Product Purchase Rate Annual fee Balance Transfer Rate
OFFER
Q Mastercard
0% for 3 months (changes to 25.99% p.a.)
$50
0% p.a. for 36 months
0% p.a. for 36 months on balances transferred from eligible personal credit cards until 30 November 2021 - offer applies to new customers only. Plus get 3 months zero interest and zero payments on every purchase.
AIRPOINTS
American Express Airpoints Platinum Card
19.95% p.a.
$195
N/A
Be rewarded with 500 bonus Airpoints Dollars when you apply by 29 November 2021 are approved, and spend $1,500 on your new Card within the first 3 months. This offer is available to new Card Members only. Ts&Cs apply. You will also earn 1 Airpoints Dollar for every $59 you spend on your card.
OFFER
Farmers Mastercard
25.95% p.a.
$50
N/A
Get $100 worth of Farmers Club Vouchers when you spend and link your card to a Farmers Club Card - offer is for new applications only and ends on 31 October 2021.
Flight Centre Mastercard
22.95% p.a.
$50
N/A
Use your Flight Centre Mastercard for everyday shopping and earn rewards as you spend. Earn 2 Flight Centre rewards for every $100 spent at a Flight Centre Store and 1 reward point for standard purchases. Subject to lending criteria. Ts&Cs apply.
AIRPOINTS
American Express Airpoints Card
0% for 6 months (changes to 19.95% p.a.)
$0
N/A
Be rewarded with 100 bonus Airpoints Dollars when you apply by 28 February 2022, are approved and sped $750 on your new card within the first 3 months of membership. This offer is available to new Card Members only.
OFFER
American Express Platinum Edge Credit Card
2.99% for 6 months (changes to 19.95% p.a.)
$149
N/A
Enjoy a low rate on purchases and earn 20,000 Membership Rewards Bonus Points if you apply, are approved and spend $750 in the first 3 months of Card membership. This offer is available to new Card Members only.
OFFER
American Express Platinum Card
N/A
$1,250
N/A
Get the new metal Platinum Card, 80,000 Membership Rewards bonus points, up to $300 dining credit and $200 to spend on travel each year. Offer available to new customers who apply online, are approved and spend at least $1,500 in the first 3 months. Exclusions, Ts&Cs apply.
LOW RATE
The Co-operative Bank Fair Rate Credit Card
12.95% p.a.
$20
0% p.a. for 6 months
0% p.a. on balance transfers for 6 months, plus benefit from a low rate of 12.95% on both purchases and cash advances.
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