How is credit card interest calculated?

Credit card interest can be confusing to understand when so much of your money is being thrown around on a regular basis – not to mention some people have multiple cards with multiple rates.

While the option to move over to a debit card has proved enticing to some, many still recognize that credit cards offer tremendous value (not to mention credit card rewards) when wielded with steady hands.

The trick, as it is with many financial products, is to avoid getting hit by nasty interest charges … but first you must understand them.

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How credit card interest is calculated

Calculated on a daily basis by your financial institution, credit card interest is determined with a simple formula:

The outstanding daily balance on purchases made, cash advances and special balances, plus any previously unpaid interest…

Multiplied by the daily interest rate of your credit card (calculated by dividing the annual rate by 365).

The types of credit card interest explained

While the stock standard calculation of determining your credit card interest is fairly straightforward, you should be mindful of the different types of interest you can tally by using your credit card in a variety of ways.

Purchase interest

These charges are for standard purchasing costs; such as when you go to the shops, get groceries, or when you pay a bill online. You can minimise these charges by opting to use a standard savings/transaction account card in lieu of a credit card for everyday transactions.

Interest on cash (cash advance)

This is the interest you’re charged on cash transactions. You can avoid this by not using your credit card to withdraw cash from ATMs or performing funds transfers.

Special interest

These are interest fees charges on special transactions (e.g. promotional transaction deals, balance transfers to a different financial institution than your own).

Balance transfer interest

Like the name would imply, this is the interest you’re charged when you perform a balance transfer from one credit card provider to another. Any unpaid debt at the end of the special offer period typically reverts to the purchase interest rate. But check the details of the offer before signing up for the balance transfer.

Credit card interest free period

You should also be mindful that you can avoid interest pitfalls simply by paying off your credit card balance within the interest free period. This period varies from institution to institution, but is usually 44 or 55 days and gives you a chance to pay off your account in full before the bank charges any interest. That said, there is an exception, when you make a cash advance or a balance transfer the bank will begin charging you interest immediately.

Interest never goes away; it accumulates until you pay off the closing balance of your account. To avoid being hit by massive interest charges, don’t just pay of the minimum amount due every month: pay it off in full. For more credit card tips, read our article about credit card control tactics.

You can view the current low rate credit card products available to the market, providing over 45 days interest free below in our comparison table below. These products have been sorted by purchase rate (lowest to highest) and are based on a $2,000 monthly spend

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CANSTAR is an information provider and in giving you product information CANSTAR is not making any suggestion or recommendation about a particular credit product. If you decided to apply for a credit card, you will deal directly with a financial institution, and not with CANSTAR. Rates and product information should be confirmed with the relevant financial institution. For more information, read our detailed disclosure, important notes and additional information.

The inclusions mentioned represent a selection of what is covered at the time of writing. Additional terms and conditions may apply to different features. Additional fees may apply to the product. CANSTAR is not making any suggestion or recommendation to you about this product. Please ensure that you read the product disclosure statement to determine all the current options and inclusions for the product you are considering.

Important Notes: The Star Ratings in this table were awarded in October 2016. The search results do not include all providers and may not compare all features relevant to you. View the CANSTAR Credit Card Star Ratings Methodology and Report. The rating shown is only one factor to take into account when considering products.

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