Credit card interest is a premium paid to your card provider on your outstanding credit card balance. Interest rates are calculated as a percentage and shown as an annual figure, such as 21.7 per cent p.a. (per annum).
Credit cards offer varying interest rates and charge for different types of transactions – the most common being a purchase rate and cash advance rate.
How common are credit cards with interest rates under 14 per cent?
Interest rates can vary extensively from card to card – with some being in single figures and others above 20 per cent. Interest rates under 14 per cent are reasonably common.
Interest rates are generally calculated based on the type of credit card and its inclusions.
As a guide:
- Gold, platinum and rewards credit cards will tend to have higher interest rates due to complimentary insurances or attractive rewards programs.
- Standard or ‘no frills’ credit cards will tend to have lower interest rates.
So while it’s definitely possible to find credit cards with interest rates under 14 per cent, you’ll likely be getting a basic credit card without a rewards program – and potentially a lower credit limit.
How is credit card interest calculated?
Despite interest being displayed as an annual percentage, most credit card providers calculate interest based on your daily balance, and add the charges to your account at the end of each statement period.
To calculate how much interest you’ll pay, you need to divide your card’s annual interest rate by the number of days in a year (e.g. 21.7 per cent divided by 365). You can then apply this figure to the daily balance on your credit card.
What is an interest-free period?
Many credit cards offer interest-free periods in which no interest is charged on new purchases. The interest-free period for purchases starts at the beginning of the statement period (not the date on which you make the purchase) and ends on the date on which payment is due for that statement period.
Note, the interest-free period only applies if you:
- Pay the amount off within the interest-free period (which is often between 44 and 62 days)
- Pay off your previous month’s balance in full by its due date
How can I avoid paying credit card interest?
The simplest way to avoid interest is to pay off your balance in full every month (or within the interest-free period).
So, it pays to always be proactive to stay on top of your payments. Also, avoid accumulating a balance that you can’t comfortably pay back every statement cycle.
Another way to avoid interest is with a balance transfer. Most banks run competitive balance transfer offers at least once a year. They allow you to transfer your credit card debt to another provider with a promotional low-interest offer – for example 0 per cent for 20 months. Balance transfers can be a good option if you have a large credit card balance that’s incurring a lot of interest.
What is the minimum monthly repayment?
The minimum monthly repayment is the lowest amount you need to pay back on your credit card balance each payment cycle. While you are only required to pay the minimum amount, it’s a good idea to pay more as your balance will be paid down quicker and incur less interest.
What types of credit card interest rates are there?
Interest can be a tricky thing to get your head around – especially because there are different types of interest rates. The most common ones are:
- Purchase interest rate – This is the interest rate that applies to credit card purchases in retail stores, departments and online.
- Cash advance interest rate – This applies to cash that you withdraw from your credit card either via ATMs or cash equivalent transactions like gift cards.
- Balance transfer interest rate – If you choose to do a balance transfer, your new credit card provider might charge you a one-off interest fee for transferring the debt (kind of like an administration fee).
- Promotional interest rate – Credit card companies offer promotional interest rates (such as balance transfer offers). It’s important to note that while promotional interest rates are usually great offers (as little as 0 per cent), they revert to a higher interest rate after the promotional period ends.
How do I choose the best credit card for me?
With so many credit cards out there, it pays to take time to do your research. Ask yourself what you need: a low rate, travel rewards, shopping rewards, a promotional interest rate, a long interest-free period and so on. Even a small difference in interest rates can have an impact on your ability to comfortably manage your credit card.
^The top or best credit card for you may not be the same as the top or best credit card for somebody else, depending on your financial goals and household budget. Remember to compare the features and benefits of the available credit card options before making your choice, and read through the fine print. For more guidance on selecting the best credit card for your needs, consider contacting a qualified financial adviser.