Maybe thinking about your credit card interest rate and how your bill gets tallied up at the end of each month seems far too complicated to try and understand. Or, you may think you know all there is to know about credit card interest. Either way, you may be surprised.
Rewards credit cards also tend to have higher interest rates than those cards without rewards programs. This could be because the interest charges paid by people who don’t pay their balances in full each month are partly funding the rewards program.
When is interest charged on a credit card?
Credit card interest on purchases is usually charged when are you are not receiving the benefit of the interest free days on your card. This could be because:
- You have not paid the full closing balance on your last statement by the due date. To receive the full benefit of the interest free days on your card (e.g. 44 or 55 days) you must fully pay the closing balance on your statement each month.
- You have an outstanding balance on your credit card from a balance transfer or introductory purchase rate offer. While these balances may be being charged at a low rate of interest, or even interest free, you will lose the benefit of any interest free days on your card – and you will be paying interest on all purchases from the day that they are made. When taking advantage of these special rates, it is generally best to not make any purchases on the card.
There are also some credit cards that do not have interest free days – which means that interest will be charged on all purchases, even if the closing balance is paid in full each month.
How is interest calculated on a credit card?
Credit card interest is usually calculated based on the balance owing on your account each day, and is charged once per month.
For example, if you made a purchase of $1,000 on a credit card with an interest rate of 20% p.a. and you currently do not have the benefit of any interest free days, you would be charged just over $16 in interest if you paid off the purchase after exactly 30 days.
|Purchase Amount||Purchase Rate (p.a.)||Daily Rate||Interest Per Day||Interest Per 30 Days|
Since interest is being calculated every day on your card when you have a balance owning, it is always better to make payments when you are able to, rather than waiting for the “Due Date”. Any payment you make will lower the daily balance and the amount of interest you are charged at the end of the month.