What are credit card interest rates?

When you borrow money on a credit card, you could be charged interest.

How interest is calculated

The amount of interest you could pay on any credit card borrowing is worked out as a percentage.

  • The higher that percentage, the more expensive it'll be to borrow.
  • The lower it is, the cheaper it'll be.

You might find the APR, or Annual Percentage Rate, useful when making quick comparisons between credit cards, but make sure you read through all details carefully to understand all borrowing costs, including credit card fees and charges.

For a quick run through, watch our short video.

 

Watch our video to understand what credit card interest rates are.
  • Helping you understand credit card interest rates.

    This is Ben.
    He’s got a new credit card to help him pay for some expenses. Ben knows that when he borrows money with his credit card, he’ll be charged interest, as well as any fees and other charges.

    The amount of interest Ben needs to pay is worked out as a percentage of the money he’s borrowed.

    And that’s his interest rate.
    The higher it is, the more expensive it’ll be for Ben to borrow.
    The lower it is, the less expensive it’ll be for him to borrow.

    There are generally two ways in which you’ll see interest rates for credit cards.

    The first is the Simple Annual Rate, or SAR, which is usually divided by 365 to work out how much you’ll be charged each day. It’s then shown as either a monthly rate or an annual rate.

    And the second is the Annual Equivalent Rate, or AER, also known as ‘per annum’, AER shows the effect of ‘compounding’ the simple rate over one year. Compounding is when interest is added to a balance, increasing the total amount that future interest charges may apply to.

    Depending on how you use your card, the amount of interest you’ll pay could vary. For example, there can be different rates for purchases, balance transfers and money transfers.

    So, let’s say Ben has a Simple Annual Rate of 20% on his credit card purchases. Ben spends £1,000 on Day 15 of the first month he has his new credit card. On Day 30, his first credit card statement is ready. It shows Ben that he has until the 25th of the following month to make his minimum payment of £25.

    Ben then pays only his £25 minimum payment on that due date.

    Using the Simple Annual Rate to calculate the interest on Ben’s £1,000 balance, from the date he made his purchase, to the date he made his minimum payment, it will be 54.79p of daily interest.

    Because Ben made his minimum payment, his balance reduced to £975.

    From the date he paid his minimum payment, to the end of that month, Ben’s daily interest then reduced to 53.42p.

    So, the interest charged so far on Ben’s Month 2 statement works out to £25.12, and he’ll continue accruing daily interest on his monthly balance until he clears it.

    But, if Ben can make a habit of paying more than his minimum monthly payment, he’ll clear his balance faster and pay less interest.

    That’s why we think it’s a good idea to pay as much as you can each month.

    So that was just an example. Not all credit cards will have the same number of days to pay, or will have the same statement day that we outlined for Ben.

    Before we wrap up, let’s go over some key points.
    How you use your credit card can affect the amount of interest you pay.
    For example: purchases, balance transfers, money transfers and cash transactions can all have different rates.
    Keep in mind that your credit card interest rate doesn’t include any fees or extra charges you may have.
    And remember, the more of your balance you pay off each month, the less interest you’ll pay.

    We hope this info helps. Thanks for watching!

Different rates apply to different things

It’s useful to know that different rates of interest might apply to portions of your balance, depending on transaction type, and whether the standard or a promotional interest rate applies.

Card purchase rates

This is the rate of interest which applies when you pay for goods or services with a credit card. It’s also the interest rate that the APR is based on.

Balance transfer rates

When you move balances from one credit or store card to another, that’s a balance transfer. In addition to interest, a transfer fee might apply.

More on balance transfers

Money transfer rates

When you move funds from a credit card to your UK bank account, that’s a money transfer. In addition to interest, a transfer fee might apply.

More on money transfers

Cash transaction rates

Cash transactions include ATM withdrawals and purchasing foreign currency. As well as interest, cash advance and non-Sterling transactions fees could apply.

How to minimise interest charges

When offers apply

 

If there’s a 0% introductory or promotional interest rate on your account, as long as you make transactions within any specified dates, you won’t be charged interest for a set period of time -usually a number of months. It’s important to know that standard interest rates will apply to any remaining balances when a promotional rate expires.
 

To see the interest rates which apply to your account, check out your latest credit card statement.

When offers don’t apply


Even if there aren’t promotional interest rates available, if you pay your credit card statement balance in full and on time every month, you won’t be charged interest on card purchases. However, this might not be realistic for people using a credit card to spread the cost of larger purchases, or to consolidate a number of balances.

 

If you can’t pay your whole statement balance each month, it’s a good idea to pay as much as possible to keep any interest costs to a minimum.

Frequently asked interest questions
 

A summary on credit card interest rates

Interest is charged as a percentage on the money you borrow on a credit card.

 

  • Different rates of interest can apply to different transaction types.
  • Introductory or promotional interest rates could reduce the cost of borrowing.
  • As well as interest, other fees and charges may apply.
  • Check your latest statement to see the interest rates which apply to your account.

Halifax is a division of Bank of Scotland plc. Registered in Scotland No. SC327000. Registered Office: The Mound, Edinburgh EH1 1YZ. Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 169628.