What are credit card interest rates?
An introduction to interest rates and how you’re charged for borrowing.
When you borrow money on a credit card, you’ll be charged interest. The amount of interest you’ll pay is worked out as a percentage of the money you’ve borrowed.
This percentage is called your interest rate. The higher it is, the more expensive it’ll be for you to borrow. The lower it is, the less expensive it’ll be for you to borrow.
But it's important to note that this interest doesn’t include any fees and other extra charges.
For credit cards, interest rates can be broadly presented in a couple of ways…
Firstly: the simple interest rate.
This is the actual rate used to calculate how much interest you’ll pay. You’ll see the simple rate shown as either a monthly rate, or an annual rate also known as the Simple Annual Rate (SAR).
SAR is usually divided by 365 to calculate how much you’ll be charged every day.
The second type of interest rate 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 we add interest to a balance, increasing the total amount that future interest charges may apply to.
Depending on how you use your credit card, the amount of interest you’ll pay could vary. For example, there can be different rates for purchases, balance transfers, money transfers or cash transactions.
You’ll find details of interest rates and how interest is charged on your latest statement, or in the terms and conditions of your account.
Now, let’s look at an illustrative example to see how card purchase interest rates work in practice.
Dan has a new credit card with a Simple Annual Rate of 20% on card purchases. Dan spends £1,000 on Day 15 of the first month with his new credit card. On Day 30, his first credit card statement arrives.
This first statement shows Dan has until the 25th day of the next month – Month 2 – to at least make his minimum payment of £25 or to make sure he doesn’t pay interest on his purchase, to clear his full balance on time.
On Month 2, Day 25, Dan pays only his £25 minimum payment. This means the interest charged on his Month 2 statement is calculated from Month 1, Day 15, when he made his purchase.
It is calculated as follows.
If we use the 20% Simple Annual Rate to calculate the interest… on his £1,000 balance from Month 1, Day 15 until Month 2, Day 25 it will be 54.79p of daily interest. And when Dan made the first minimum payment, the daily interest on his balance of £975 was reduced to 53.42p from Month 2, Day 25 until Month 2, Day 30.
So, in total, the daily interest charged so far on his Month 2 statement is £25.12. And he’ll continue accruing daily interest on his monthly balance until he clears it.
But if Dan regularly pays more than his minimum payment he’ll clear his balance faster and pay less interest on the money he borrowed. That’s why we recommend paying as much as you can every month.
Please note that not all credit cards have the same number of days to pay or statement on the same day as in this example. This can vary, so be sure to check your card’s terms and conditions.
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Frequently Asked Questions
Interest is calculated daily and charged to your credit card statement when it’s produced each month.
A variable interest rate is an interest rate that can change over time – whether up or down.
This depends on economic conditions, how you manage your account and a variety of other factors.
A good example is if your credit score changes.
A very low or 0% interest rate/ interest free period given for a set amount of time.
If you research and plan how you’re going to use the introductory offer, you could reduce the amount of interest you’ll pay overall.
Just remember to check if any other fees apply.
And keep an eye on the exact date when your offer runs out and the card returns to its standard interest rate.
This is usually reflected on your credit card statement.
Sometimes, the interest rate isn’t the only cost of borrowing with a credit card.
To account for this, Annual Percentage Rate (APR) considers both a card’s interest rate and any other standard fees.
This means that the APR percentage offers a more complete picture of how much borrowing will cost.
Important legal information
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