How is interest calculated on a credit card?

When comparing credit cards, you’re often told to consider the interest rate, but what exactly is interest? And how do lenders calculate how much interest you pay?

What is credit card interest?

A credit card allows you to access a line of credit up to an agreed amount with your lender, while interest is the amount you owe your lender on top of the money borrowed. With a credit card, you pay interest on each purchase not repaid within your lender's ‘interest free' period.

How is interest calculated on a credit card?

There are various factors that impact how interest is calculated:

The amount of the purchase: Your interest rate will be a percentage of the amount of each purchase you make.

Your bank or financial institution: They’re free to set any interest rate at their own discretion, so its important to compare different lenders

The interest rate: When you sign up for the credit card, you agree to pay interest at rates that may vary depending on the type of transaction. For example, some credit cards will have a specific rate of interest charged on each purchase. But keep an eye on any cash withdrawals, as the interest rate might be higher than your purchase rate.

Late repayments: If you don’t repay the minimum monthly repayment by the due date, you may to pay the default interest. Default interest is higher than the standard interest rate and it will increase the amount of interest you pay. If you don’t pay the minimum repayment due each month, you might also face an additional late payment fee.

Introductory or honeymoon rate periods: Some lenders offer ‘honeymoon’ interest rates to help entice people to sign up for their credit cards. These are usually lower interest rates on purchases made within a certain period. Watch out for the standard rate the interest reverts to after the honeymoon period is over.

How often do you get charged interest?

Most lenders will charge interest monthly and you’ll see this charge on your monthly statement. You’ll have a set date to make your minimum repayment. If you’re unable to make your minimum repayment by this date, you might have to pay additional interest and a late payment fee.

Reducing your interest

There are few ways to minimise or avoid paying interest on your purchases, as interest is the cost of borrowing the money. The only way to avoid paying any interest is to pay off your purchases during the ‘interest-free’ period. You’ll still have to pay any account fees for maintaining the card.

To reduce the amount of interest paid, consider paying off more than the minimum repayment by the due date. This will also help reduce the amount of money owed on the card and, in turn, will help you pay off the debt sooner.

Credit cards can be useful tools for people looking to take advantage of the rewards programs. They can also help you make the most of your budget, without missing out on anything in life.

To find a competitive interest rate, start comparing credit cards now.

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