Understanding how credit card interest rates work is essential if you're thinking about applying for a card.
Interest rates can indicate how much it'll cost you to use your credit card, so you need to know how they work.
Credit card interest rates are usually quoted in terms of APR (annual percentage rate).
A low APR means you'll 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.
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You may not always have to pay APR because many credit cards offer interest fee periods. There's more to choosing the right card than getting one with the lowest APR.
APR helps you to compare cards by averaging out the total costs over the year. However, interest is charged 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:
How to 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've borrowed. The amount you owe as interest one 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.
How the interest is calculated varies between credit card providers. You can estimate the amount you owe by using an interest rate calculator. You will not be able to determine the exact amount because it depends on which calculation your credit card provider uses.
To find out the exact rate, contact your credit card provider.
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's the lowest amount you can repay each month without harming your credit file. It's 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 if the amount changes.
Just meeting the minimum amount means your monthly payments are low and affordable. But it also means you stay in debt for longer. And unless you clear the balance within an interest free period, you could end up paying a lot of interest.
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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, you'll technically pay less and less over time. But you'll still owe the credit card provider money because the balance will barely decrease.
As a general rule, if you can 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.
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.
Of course, this may not alway be possible. Especially if you've used your card to pay for a big purchase you could not afford upfront.
If that’s the case, set up a Direct Debit of 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.
Interest free periods are not indefinite. They are usually fixed for a a set amount of time. Make sure you know how long the 0% period lasts for. Once it expires you could find yourself paying a high level of interest.
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Other reasons you'll be charged interest on your credit card
APR is not hte only interest you may have to pay on your credit card debt.
You'll often also have to pay interest on:
- Cash withdrawals
- Balance transfers (if you cannot get a 0% balance transfer credit card)
- Foreign currency transaction fees
You're charged interest on cash withdrawals from the moment you take out the money. It's charged at a daily rate, making withdrawing cash on a credit card very expensive.
Without a 0% balance transfer card, moving debt from one card to another could still cost you interest on your debt.
Thanks to foreign currency fees, you'll be charged interest on your purchases abroad. Minimise this cost with a travel credit card. This is not the same as a card that gets you airmiles.
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!
Stoozing - Use credit cards to boost your savings
Stoozing is the art of making money from borrowing on money transfer credit cards with 0% APR.
Here's briefly how it works: 1. Use a credit card to transfer cash into a high interest savings account at the start of the interest-free period. 2. Let the money accrue interest in the savings account (aka, the stoozer). 3. Use that money to pay off balance on the credit card before the interest-free offer ends. 4. Keep the interest the cash earned in the savings account.
You have to find the best bank accounts, lowest transfer fees and carefully manage your card payments.