Credit cards can be a really convenient way of paying for things. But as we all know, using credit means that it will need to be paid back. And if it’s not paid back by a certain date, then your credit card provider will charge you interest.
Even the most financially savvy of people can find themselves paying interest on their credit card. An unexpected bill, such as a car service or visit to the dentist, can lead to increased spending on your card.
Falling behind on payments means you’ll be charged the standard interest rate, and often additional fees and charges. So, your balance won’t reduce as quickly, and you end up paying additional interest on a higher balance.
To help you with your budgeting, we’ve rounded up some information to help explain how credit card interest and purchase rates work.
What is a purchase rate?
A credit card’s purchase rate is often referred to as the interest rate, but they are slightly different. The purchase rate is the interest rate charged on purchases, and doesn’t include cash advances or balance transfers.
What is interest charged on?
Interest can be charged on any part of your credit card balance. Your balance might include: services and items you’ve bought, outstanding amounts for past purchases, and cash advances. Interest may also be charged on interest outstanding from previous months, and any other related fees and charges.
Interest on purchases and services
If you don’t pay your credit card balance off in full by each statement’s due date, interest on your closing balance is usually charged at the end of the statement period.
Interest on cash advances
For cash advances – which is when cash is taken out at the ATM with your credit card – interest is usually charged straight away. Even if you intend to pay the closing balance on your statement in full by the due date, interest on cash advances will be charged from the day you withdraw it, until you pay it off in full. For this reason, many people avoid withdrawing cash from an ATM with their credit card. The cash advance rate is usually higher than the purchase rate, so before you sign up for a credit card, it’s a good idea to think about how much and how often you would withdraw cash on your credit card.
If you are changing credit card providers, some offer interest-free balance transfers for a set amount of time. This means you won’t have to pay interest on the balance of the old credit card account that’s been transferred to your new credit card account. At the end of the promotional period, interest will start being charged on any remaining balance transfer amount, so it’s important to have a regular payment plan to reduce or pay off this balance before the promotional period ends. It’s also important to note that purchases you make during the promotional period will still be charged interest.
How much interest is charged, and what about annual fees?
Annual fees are charged on some credit cards as a cost for the convenience of being able to use the credit card, and the fee varies in price. Similarly, the percentage of interest charged varies by credit card provider. Some credit card providers have lower interest rates, while other credit cards offer extra benefits.
What are interest-free days?
Interest-free days are just that: days where no interest is charged. These interest-free days give you time to pay off any outstanding balance. If you pay your credit card off in full by the due date on your statement, you won’t be charged any interest (unless you’ve done a cash advance). The number of interest-free days varies by provider, and on average ranges from 40 to 55 days, with some providers offering up to 62 days.
When purchasing a credit card, always check the terms and the conditions to see how much interest you’ll be charged, and what for. That way you’ll choose the credit card that best suits you.