A Guide to Credit Card Interest
Posted January 7th, 2009
and last modified December 2nd, 2009
This comprehensive guide has been designed to explain the concept of credit card interest, along with all the subtle nuances associated.
What is ‘Credit Card Interest’?
No financial provider is interested in leasing credit to consumers without at least a slight return. In a literal sense, if a bank lent you $2000 and you were only required to repay $2000 back, there’s no interest in them lending to you.
However, if you were required to repay $2100 in return on the $2000 lent, you have been charged a 5% interest rate. While there’s more to it than that specifically, this is a simple explanation of interest in financial terms. As credit cards are Unsecured Credit, banks compensate for this risk by charging interest to cover the minority who do not repay.
How is interest calculated?
Interest rates are always given as an APR (Annual Percentage Rate). However, interest is accumulated daily. For example:
- Your credit card has a 13% interest rate. You make a $400 purchase on January 1st. You completely pay the purchase off on February 28th (58 days later).
- First, find the annual percentage of the purchase as a whole (13% of 400 = 52.)
- Next, find the daily accumulation by dividing by 365 (58/365 = 0.1424657).
- Finally, multiply this figure by the amount of days between the purchase and repayment (0.1424657 x 58 = $8.2630106).
How often is Interest Charged?
Interest is charged at the end of your credit card statement period. The length varies from card to card and bank to bank. While you should aim to pay off your statement in full, you can get by simply paying the Minimum Monthly Repayment. If you miss the minimum monthly repayment, not only will you be charged at $10-$40 fee, but repeat offenders will damage their credit score.
How can I reduce my Interest Repayments?
There are several methods and techniques to cut interest accumulation with credit cards:
- Reduce the amount of time between the date of purchase and date of repayment
- Use a low interest credit card. These typically offer up to 10% lower rates than standard rewards, gold, platinum and no fee cards.
- Take advantage of the 44/55 day grace period which comes with 95% of credit card offers. Aim to use your credit card at the beginning of your statement rather than the end. Read more about the 55 day interest free period here
- Carry about a balance transfer. If you have a high balance on one or multiple credit cards, you can transfer it over to a new credit card and repay at 0-8% APR. View the best balance transfer credit cards or read our balance transfer guide here.
What are the 2 Best Australian Low Interest Cards?
As of January 15th 2009, here are two of the most popular low rate credit card offers available for online application. Like any credit card, their features are subject to change at any time.
#1 – Aussie MasterCard
Since their establishment, Aussie have become renowned as consumer champions and built their brand around their popular Aussie Home Loans. When it comes to their single credit card, it also stands out from the crowd as a truly unique and competitive offer. It offers:
- 2.99% on purchases for 6 months (11.74% after)
- 17.99% on cash advances.
- A $49 annual fee.
- 2.99% balance transfer for 6 months.
#2 – St George Vertigo MasterCard
With Money Magazine’s ‘Cheapest Credit Card of the Year’ award for both 2007 & 2008, it’s no doubt a quality low rate card. It features:
- 11.49% on purchases.
- 19.99% on cash advances.
- A $55 annual fee.
- A 2.99% for 6 month balance transfer offer.
- Access to St George ‘Instant Benefits’ – while St George doesn’t offer a reward’s program, they offer various discounts and privileges on any of their cards.
Related Articles for worth reading:
Related posts:
- New to Credit Cards? A Guide to Interest Rates
- St.George Vertigo MasterCard Repayments Guide
- Credit Card Interest Rates
- Interest Rate Repayment Explanation
- Guide to Introductory Honeymoon Credit Card Rates
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Editor's Choice: Our Top Credit Cards
Bankwest Lite MasterCard
Cheapest Credit Card
The lowest stress mastercard, with Australia's lowest MasterCard purchase rate of just 10.75% p.a.
St George Vertigo
Best Bank
Low 2.99% for 6 months (reverts to 11.99%) p.a. interest rate and balance transfer rate, from one of Australia's most respected banks.
Coles Group Source MasterCard
Citi Clear Platinum Visa
Low Interest
An excellent low interest credit card offer with 11.49%interest on purchases and 0.99% for 6 months on balance transfers .
Bankwest Zero Platinum MasterCard
No Annual Fee
Excellent introductory offer with a $0 annual fee for the life of the credit card and a 1.99% p.a. for 9 months on balance transfers