When you use a credit card, you're borrowing money from your account's credit limit. So just like any other loan, interest may be charged on the balance.
How and when this interest is charged will have a big impact on what you'll pay to use your card.
Interest rates are a type of fee that's charged when you borrow money. Meaning when you pay back what you owe, you actually end up paying more than what you've borrowed. With credit cards, interest rates are calculated as a percentage of your balance and shown as an annual or per annum figure. For example, a card could have an interest rate of 9.99% p.a. (per annum) or 21.99% p.a.
Most credit cards also charge different interest rates for different types of transactions, with the most common being a rate for purchases and a different, usually higher, rate for cash advances.
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 (month). To figure out your credit card interest charges, the amount you owe 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 way credit card interest is charged is known as "compound interest" meaning that you could end up paying interest on your previous 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.
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.
The simple answer is that your repayments will go towards the balance attracting the highest interest first. Anything remaining will go towards the next highest interest balance, and so on down the list.
If you only have one interest rate for your entire balance (say, if you've only used it for purchases), you can use our calculator to figure out how long it would take you to pay off your credit card debt for a given monthly repayment.
| Balance type | Initial debt | After first $500 payment | After second $500 payment | After third $500 payment |
|---|---|---|---|---|
| Cash advance (21.99% p.a.) | $300 | $0 | $0 | $0 |
| Coffee machine purchase (17.99% p.a.) | $500 | $300 | $0 | $0 |
| Balance transfer (promotional 0% p.a.) | $1,200 | $1,200 | $1,000 | $500 |
| Total debt | $2,000 | $1,500 | $1,000 | $500 |
As you can see, the repayments have gone to the highest interest parts of the debt first. This leaves you with $500 owing after three repayments.
In this example, we've assumed your introductory balance transfer rate applies for the entire time. But if the 0% balance transfer rate ended after the first repayment and went to, say, 21.99% p.a., it would be paid off before the coffee machine purchase.
Watch out: Making purchases with an active balance transfer
The payment hierarchy almost always means you'll owe less money in the long run. The main exception is when it comes to introductory rates on balance transfers. Your introductory 0% interest rate means repayments will always go towards purchases first since they will be charged interest.
But once the introductory period ends, you could be left with a large balance that attracts higher interest than any purchases. This means it is important to avoid purchases until you've paid off your balance transfer if possible. Otherwise, see our guide for tips on managing purchases on balance transfer cards.
The current payment hierarchy system has been in place since 1 July 2012, following credit card reforms. Previously, repayments would go towards the most recent transaction instead of the highest interest balance.
Two other important reforms were introduced at the same time:
For more info on credit card reforms, see this page. If you want to learn more about making repayments, this guide takes you through the process. You can also use the repayment calculator to work out a payment plan or look at cards that offer instalment plans with fixed repayment options.
| Response | |
|---|---|
| Every month | 71.32% |
| Most months | 12.5% |
| About half the time | 6.62% |
| Rarely | 6.62% |
| Never | 2.94% |
As well as interest rates, make sure you consider the following when you're looking for a new credit card:
APR is the acronym for Annual Percentage Rate, which is the standard way of expressing the cost of credit as an annual percentage.
An interest charge refers to the interest fee you'll have to pay on your credit card account. This can be in the form of a purchase interest rate, cash advance interest rate or balance transfer interest rate and is calculated as a percentage of what you owe.
Compare your options. Use the table on this page to see Finder's selection of low rate credit cards, check out some reviews and find the right deal for you. If you've already got a credit card and you're paying too much interest, consider a balance transfer credit card.
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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.