Interest Rate Repayment Explanation

The most common financial term you will hear from day to day would very likely be Interest rates. The term is no different for credit cards. The key feature by which people tend to judge cards by is their interest rates. This article will explain what exactly an interest rate is on a credit card, along with how to ultimately reduce your interest repayments.

Financial providers and banks make the majority of their money from credit cards via interest rate repayments. If you’re late on your payments, generally they will penalize you with an inflated rate.

Two different rates are often available on a credit card, a purchase rate and a cash advance rate.

What is the difference between these 2 interest rates?

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Purchase rate: Using your credit card for over the counter, telephone or online purchases. Self explanatory, basically the interest rate charged on purchases.

Cash advance rate: Most banks charge a separate, higher interest rate, and a cash advance fee (ranging from 1 to 5% of the amount of cash taken) on cash or cash-like transaction (called “quasicash” by many banks). For instance, if you withdraw $100 cash, you may imposed a 2.5% fee equating to $2.50, on top of a high interest rate of 19.99% on the withdrawn amount.

These transactions are usually the ones for which the bank receives no transaction fee from the payee, such as cash from a bank or ATM, casino chips, and some payments to the government (and any transaction that looks in the bank’s discretion like a cash swap, such as a payment on multiple invoices).
In effect, the interest rate charged on purchases is subsidized by other profits to the bank.

Interest rates typically range from 9-20%. One of the lowest interest rates currently belongs to the St.George Vertigo card at 11.49%. Since interest on your credit card is paid monthly, you can effectively divide the interest rate given (The Annual Percentage Rate or APR) to find out what you repay monthly.

Interest Rate Calculation

If you made a $100 purchase on the 20th of September, and repaid your total $100 balance on the 10th of October (30 days later), and your interest rate is 15%, your repayment will typically be $101.25. Thus you have paid $1.25 in interest. The maths:

15% of $100 = $15. This is what you would pay if you took 365 days to repay your purchase, calculated on your APR.
Since it only took 30 days to repay your purchase, you can effectively divide your APR by 12 to find out your monthly interest rate payment.
For simple and advanced interest calculations, see our Credit Card Repayment Calculator.

Lowering your Interest Repayments

So how can you keep your interest repayments to a minimum? The good news is, competition between Australian banks forces them to lower interest rates in order to compete, resulting in our interest repayments actually being relatively low.

The even better news is, most cards come 55 days interest free. Basically, this means that if you pay off your purchases within 55 days of your last statement, you pay 0% interest on them. However, interest free days aren’t available on cash advances, so limit the cash advance withdrawals you take if you want pay minimum to nil.

If you aren’t aware of Balance Transfers (another key element in saving money with credit cards), Read our guide to balance transfers here.

Related posts:

1. How to Find the Cheapest Interest Rate Credit Card?
2. Isn’t it time you Fixed your Interest rate?
3. How Interest Rate Changes Work
4. Credit Balance Transfer Explanation and Tips
5. Low Interest Rate Credit Cards in Australia
6. St.George Vertigo MasterCard Passing On RBA Interest Rate Cuts
7. St.George Credit Card Repayment Methods

Editor's Choice: Our Top Credit Cards

Credit Card	Card Details	Interest Rate (p.a.)	Cash Advance Rate (p.a.)	Balance Transfer Rate (p.a.)	Annual fee	Interest free days (up to)
St George Vertigo	Editor's Choice: Low Interest 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.	2.99% for 6 months (reverts to 11.99%)	20.74%	2.99% for 6 months	$55	55
Coles Group Source MasterCard	The Coles Group Source MasterCard has no annual fee, a 0% p.a. balance transfer offer for 6 months, with a rewards program including savings on fuel and FlyBuys Points	19.74%	21.99%	0% for 6 months	$0	62
Bankwest Zero Platinum MasterCard	Editor's Choice: 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	16.99%	16.99%	1.99% for 9 months	$0	55