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Edited by
Joelle GrubbUpdated
When you use a credit card, you’re 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’ll pay for the use of your credit card.
To make sure your credit card works for you, here you’ll find answers to the most common questions about interest, including the different rates that may apply and when it’s charged. We also look at how you can compare credit card interest rates and take advantage of interest-free days so you can avoid interest charges.
Interest rates are a type of fee that’s 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 figure.
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.
The interest rate on credit cards is normally shown as an annual figure. But 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 get the total interest due. The daily interest rate is calculated by dividing the EIR by 365 days.
The way credit card interest is charged is known as “compound interest” because it is calculated daily. This means that you could end up paying interest on your interest charges. The good news is that you can cut down on interest costs any time you make a repayment, because that will also affect the daily interest calculation.
Here are the most common types of interest rates you’ll find on credit cards:
Even the smallest difference in credit card interest rates can have a huge impact on your account costs. So when you’re 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.
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 made monthly payments of $50 on this debt, it would 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 would still take around 2 years to pay off your balance but would cost you $153 in interest. That's a saving of $59 compared to the card with a higher rate, which is basically another monthly repayment. The bigger the difference in rates, the greater these potential savings would be.
* This is a fictional, but realistic, example.
As well as interest rates, make sure you consider the following when you’re looking for a new credit card:
If you’re looking for a new credit card, use our table below to compare your options based on interest rates. Just click on the “Purchase rate” column and the table will update to show you cards with the lowest to highest rates.
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