Understanding credit card interest rates will help you choose the right card for your financial needs.
Most credit card issuers charge interest—after all, it’s the main way they generate revenue. However, a high purchase rate on a credit card can end up costing you, the consumer, a whole lot of money. With this in mind, if you want to make the right choice when looking for credit cards, it’s vital you compare interest rates and go for the most competitive deal.
What are credit card interest rates?
Interest refers to the fee levied by credit card issuers for using their card. It is normally expressed as an annual percentage rate (APR). You will be charged either the purchase interest rate or the cash advance interest rate. The purchase interest rate applies when you use your credit card for making payments at retail outlets or online. The cash advance interest rate is applied on your account when you make withdrawals through ATM machines. Most credit card companies charge a higher cash advance rate than the card’s purchase rate, so keeping away from cash advances will assist in maintaining the size of your account.
How do credit card interest rates work?
The interest rate on credit cards is normally set every year, but most credit card companies calculate interest on a daily basis and levy the charges monthly. For instance, to determine your credit card interest amount, the daily outstanding balance is multiplied by the daily interest rate on your credit card, and then added together to give the monthly interest due. The daily interest rate is calculated by dividing the APR by 365 days. Most credit card companies offer interest-free days to their customers, so you can take advantage of this feature to make the most out of your card. If you don’t pay your credit card balance in full every month, your interest will be compounded and may send you into a financial mess.
How is interest calculated?
It depends on what card you have, the nature of the transactions you make, and when you make the payments. Interest is calculated on your account's outstanding balance on a daily basis. For example, you make a purchase for $50 on the first day of your statement period. Interest is calculated on the $50 balance for each day from the date of the transaction until it is repaid in full. Interest is then added daily to calculate your monthly interest amount.
Back to topWhat are the types of credit card interest rates?
- Fixed interest rate. This will not change unless the credit card company sends an advance notification to its cardholders regarding a possible rate change.
- Variable interest rate. This rate can fluctuate and the credit card company does not have to send advance notification of the rate change.
- 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 you are charged when you use your credit card for withdrawing cash from ATMs.
- Balance transfer interest rate. This is the interest rate you are charged when transferring an existing credit card debt to a new card.
- Compound interest. This is the interest rate charged on interest when you have accumulated outstanding balances on your credit card.
How to compare credit card interest rates
- Benefits. You should not choose a credit card just because it provides an attractive sign-up bonus or because you will earn free trips. You shouldn’t fall victim to a one-time bonus, but instead look for long-term benefits of using the card. A credit card offering a low interest rate or promotional interest rate could be ideal for your needs.
- Customer experience. Do your homework to check the experience of other customers with your preferred credit card. You can check the user feedback on online forums, blogs, social media and in other places. Does the credit card company keep its word on its stated interest rate? Does it have interest-free days?
- Check interest rates. Some credit card companies levy interest costs from the date you start using the card while others start applying interest from the billing date. You should check the interest rates available to ascertain what suits your needs and preferences.
- Read the fine print. Find out the suitable cycle of repayments, penalties and other charges that may be associated with using the card. Do not choose a credit card simply based on the indicated interest rate, as the card company may also charge hidden fees. Read the fine print closely.
Compare credit cards
Pros and cons
Pros
- Interest-free days. Most credit card companies will offer a grace period in which you can make purchases without paying interest. You can take advantage of this to enjoy the full benefits of your credit card.
- Minimal transfer cost. If you want to transfer your credit card debt into a single card, most credit card companies will offer you the service at very minimal rate of interest.
- Low-interest-rate credit cards. Several credit card companies are now offering low-interest-rate credit cards that will ensure you maximise your card benefits. You can contact us here at finder.com.au if you need a low-rate credit card.
Cons
- Compound interest. With the power of compounding interest, a small credit card debt can soon increase to something much larger.
Things to avoid
When applying for a credit card, it’s important that you read the fine print to understand all the terms and conditions of your agreement. If you don’t take the time to understand the fees and charges associated with using your card, you could end up with a nasty financial surprise in the future. Do your research and read all paperwork thoroughly.
Back to top
I have a Diamond MasterCard. My balance is $2700. I have paid $2500 on due date but charged $160. Is it correct? Why has this happened?
Hi Karu. It’s difficult to speculate why you’ve been charged this fee. Best to consult your credit card statement when it next arrives, or you can check your online banking facility to see why you’ve been charged this fee. If you let us know the name of the fee, we can offer some insight into why it has been charged, how to avoid it in the future, and maybe how to dispute it with the lender. Jacob.