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What are credit card interest rates?
When you borrow money on a credit card, you could be charged interest.
For a quick run through, watch our short video.
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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.
Frequently asked interest questions
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Interest is charged to your credit card statement when it’s produced each month.
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You might see an interest rate advertised as ‘variable’. That simply means it can change over time, either increasing or decreasing. This can be affected by a number of things, including economic factors, changes to your credit score and how well you manage your account.
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Introductory interest rates are usually 0% or low interest rates, available for a defined period when you take out a new credit card. You may also be offered promotional interest rates once you’ve had your credit card for a while.
It’s important to know that standard interest rates will apply to any remaining balances when an introductory or promotional rate expires.
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Sometimes, the interest isn’t the only cost of borrowing. The APR, or Annual Percentage Rate, accounts for other standard costs, such as annual or application fees, giving you a more complete picture.
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.
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