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How to calculate credit card interest

How is credit card interest calculated? The Uswitch guide explains how to calculate credit card interest based on providers’ rates for their credit cards.

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How to calculate credit card interest
How to calculate credit card interest

There are two types of bank cards available in the UK - debit cards and credit cards. When you spend on a debit card, the money leaves your account within a day or two. With a credit card, the money is added to your credit card balance, and you have the option to pay the amount off in full when you receive a monthly credit card statement.

If you do not pay off the full credit card debt and instead pay the minimum amount, you will be charged interest on the remaining balance. How much you pay depends on the interest rate of the card, known as the Annual Percentage Rate or APR. Different cards have different interest-free periods and different APRs, and this can make a big difference to the charges you pay.

Understanding how to calculate credit card interest will help you find the best credit card for you. Being able to understand and calculate interest on a credit card is essential if you are thinking about applying for a card and you want to find one that is best for your needs.

Interest rates are one of the ways to work out how much it will cost you to use your credit card, along with other charges and fees.

How does credit card interest work?

Credit card interest rates are usually quoted in terms of APR (annual percentage rate).

A low or lower APR means you will have less interest to pay on your credit card debt. It will cost less to borrow money than if your credit card had a high APR. However, some credit cards have longer interest-free periods which will also affect the amount of interest you are charged.

You also need to factor in the cost of any annual fees associated with the card, as these may be included in the overall APR figure for the year. For example, a credit card quote might give you the overall APR, including the card fee, and a different interest rate for purchases, minus any card fee.

So if you want to know how to work out the interest rate on a credit card you need to look at the small print. The average APR of a credit card in the UK without an annual card fee is around 21%, but many cards, particularly store cards, charge a much higher APR.

The other point to bear in mind is that when you look at credit card offers, the APR will be "representative". This means that you may not be offered the same APR if you are approved for the card. Your interest rate may be more, for example if you have a poor credit rating and are considered a higher risk customer.

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How to calculate credit card interest

The calculation for credit card interest is complicated because the interest is compounded daily. This means that the interest is calculated each day and added to your debt. The following day, the interest is calculated on that slightly higher debt. You also get an interest-free period of usually 56 days before any interest is added - this gives you a chance to pay it off in full without incurring any interest.

Let's say you have £500 unpaid on your credit card after paying off what you could afford. If your credit card APR is 21%, your daily rate is 0.21/365 = 0.00058. That adds 29p to your debt on day two, making your total debt £500.29. The interest rate is applied to that total, making a fraction over 29p again so on day three your debt is £500.58, and so it goes on. This interest is then billed to you monthly.

To make it easy for you, we have an interest calculator you can use to see how much your current debt will cost you.

Credit card calculator

However, if you are still spending on your credit card, any new purchases will be added to your debt about 56 days after you made the purchase. If another £100 is added to your debt just mentioned, the daily balance will have gone up to £600.58 and the daily interest will add about 35p a day. 

Your credit card company will tell you interest charged that month on each statement.

How is credit card interest calculated in the UK?

When you're approved for a credit card you can use it to buy goods and services up to your set credit limit, which is the maximum amount of money you are allowed to borrow. Each month you receive a statement detailing what you have spent and when on your credit card. You get 56 days interest-free on your purchases.

At the time of the statement you will be told the minimum payment that you need to make towards repaying your credit card debt that month. If you pay only the minimum, you will then be charged interest on the balance. You can pay off the whole of your debt in full if you wish, but if not, you must make the minimum payment.

The remaining balance – how much you owe, minus the minimum payment – is then subject to interest. The interest, known as the Annual Percentage Rate or APR, is charged on your debt unless you have a longer interest free period.

How does the Annual Percentage Rate work?

The Annual Percentage Rate (APR) is the amount of interest you pay on the outstanding balance on your credit card. If you pay off your credit card in full each month then you will not be charged any interest.

Even where you have an outstanding balance on your credit card you may not have to pay an APR on the credit card debt. That's because many credit cards offer interest free periods.

When do I start paying the APR interest rate on my credit card?

You will start to pay the APR on the outstanding balance once the interest free period ends. Therefore, it's important to work out the balance between any interest free period that you are offered, and the APR you might have to pay. There's more to choosing the right card than getting one with the lowest APR.

What does APR actually mean?

APR helps you to compare cards by averaging out the total costs over the year. However, interest is billed to you on a monthly basis. 

This video explains how lenders calculate their interest rates and what your card will actually cost you.

Our credit card calculator estimates how the amount you repay each month affects how long it'll take you to clear the balance:

Credit card calculator

Use the credit card calculator to help work out the costs of owning a credit card.

How do I calculate credit card interest rates?

The interest rate on a credit card is how much it costs you to borrow money.

It's calculated as a percentage of the amount you have borrowed. The amount you owe as interest each month is then added to the total balance. This is known as compounding interest, and continues until you clear your balance. The longer it takes you to pay off your card, the more interest you pay.

The easiest way to estimate the amount you owe is by using an interest rate calculator. The Uswitch credit card calculator can help you work out the costs of owning a credit card.

Credit card calculator

How much 18.9% APR actually cost on a £1,000 balance with £5 minimum monthly payments

Minimum repayments explained

To ensure you never owe your card provider more than you should, always meet the minimum repayment.

The minimum repayment is shown on your monthly credit card statement. It is the lowest amount you can repay each month without harming your credit file. It is usually calculated as a percentage of the total balance or a set amount. For example, 1% of your balance (plus interest) or £10.

You can set up a Direct Debit from your current account to always meet the minimum repayment, even where the amount changes. This is the best way to make sure that your minimum repayment is made automatically each month, and that you do not become liable for extra charges.

By meeting the minimum amount your monthly payments will stay low and affordable, but it also means you stay in debt for longer. Unless you clear the balance within an interest free period, you could end up paying a lot of interest.

Low APR credit cards

Find a credit card with a low rate of interest to handle your regular payments

Minimum repayments are not interest-only (like mortgages), where you pay off the interest but nothing else. Under legislation introduced in 2011, minimum repayments have to be at least 1% of your balance, plus any interest.

As minimum repayments are calculated as a percentage of your balance, if you do not add any further spending to your card, you will pay less and less over time. But you will still owe the credit card provider money because unless you start to pay off more than just the minimum repayment each month, the overall balance on your credit card will barely decrease.

As a general rule, if you can afford to pay back more than the minimum amount, then do. Never pay less than the minimum or you could lose any benefits, be charged a fee or get a mark on your credit file. If you miss the minimum repayment it will be recorded on your credit file and will affect your credit score. It is important to keep your credit score as high as possible as it helps when you are applying for other financial products and forms of credit such as mortgages, broadband packages, other credit cards or personal loans.

Avoid interest by repaying in full

Try to repay your credit card balance in full as often as you can (if not every time). The quicker you pay off your balance, the less it will cost you in interest.

This may not always be possible, especially if you have used your card to pay for a big purchase you could not afford upfront.

If that is the case, set up a Direct Debit for a fixed amount you know you can afford each month. Use the credit card calculator above to estimate how long it would take you to pay off your balance.

A monthly Direct Debit ensures you pay back your debt and keeps your credit file in good condition.

Cut interest payments with a 0% balance transfer card

A 0% balance transfer card lets you shift your debt from one card to another. It can be a good way to avoid excessive interest payments. It can also give you some financial breathing space so that you can start to clear your credit card debt without accumulating interest.

Remember that interest free periods are not indefinite. They are usually fixed for a set amount of time. Make sure you know how long the 0% period lasts for. After it expires you could find yourself paying a high level of interest. The best way to manage your finances is to use the interest free period to start paying off debt, and have a repayment plan to ensure that you have cleared the debt by the time the interest free period ends.

Compare balance transfer credit cards

Find a balance transfer credit card and stop paying expensive interest payments on your balance.

What are the other costs and interest rate charges on credit cards?

The APR isn't the only interest you may have to pay on your credit card debt.

You may also have to pay interest on:

  • Cash withdrawals (considered to include buying such things as lottery tickets, foreign currency, stocks or shares)

  • Balance transfers (if you cannot get a 0% balance transfer credit card)

  • Foreign currency transaction fees

  • Annual fees

Cash withdrawals: You are charged interest on cash withdrawals from the moment you take out the money. It is charged at a daily rate, making withdrawing cash on a credit card very expensive. You are much better withdrawing cash from an ATM via a debit card instead.

Balance transfers: Without a 0% balance transfer card, moving debt from one card to another could still cost you interest on your debt.

Foreign currency fees: Foreign currency fees mean you will be charged interest on your purchases abroad. You can minimise this cost with a travel credit card which does not charge currency fees. This is not the same as a card that gets you Airmiles or travel perks.

Annual fees: some cards charge an annual fee.

Unless you have a 0% interest card, the APR interest charge is added to your card balance. The interest is calculated on your total debt. This means you may have to pay interest on your interest.

Credit card calculator

Use the credit card calculator to help work out the costs of owning a credit card.

Credit card calculator

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