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Credit card interest – how does it work?

Credit card interest is simple, right? It's a cost charged every month as a percentage of the money you've used on your card. While you might think you understand how your interest is calculated, there can be more to it than meets the eye. Knowing which rates apply, and when, can help you track how much you’re paying to use your card.


Different cards have different rates

It’s quite surprising how much credit card interest rates vary depending on the type of card you choose. Low fee and rewards cards often have higher rates than more basic, low rate cards. As a rough guide, variable interest rates on purchases can range anywhere from 8% p.a. to 24% p.a., so it really pays to read the terms and conditions and find out what your card charges.

Most cards have more than one rate

Did you know your credit card might have different interest rates depending on how you use it? These typically include the:

  • Purchase rate, which is charged when you use your card to pay for new products or services, and the
  • Cash advance rate, which is the rate that applies to cash you withdraw from your card account, not including fees such as cash advance fees.

New credit cards sometimes also have promotional interest rates, such as the:

  • Introductory purchase rate, which may be a lower purchase rate that lasts for a set period of time to when you take up a new card, and the
  • Introductory balance transfer rate, which is often a low or 0% p.a. rate for a certain number of months on balances you shift over from cards you have with other financial institutions. Find out more about balance transfers.

There’s also compounding interest

Financial institutions charge you credit card interest daily and it’s always compounding. Compounding interest is when your interest charges are added to your debt so that you end up paying interest on the interest. This is why it’s important to understand how your credit card’s interest-free period works. It’s also another good reason to pay more than your minimum repayment amount and aim to pay off your card in full every month.

Plus interest-free days

A great way to enjoy the convenience of your credit card while minimising your interest is to make the most of your interest-free period. If you want to do this, you need to pay your balance off in full within the interest free period on your card every month. Many cards have interest-free periods of up to 44 or 55 days.

One thing to keep in mind: the interest-free period starts from the first of the month, rather than when you make the transaction. This means you only get the full number of interest free days on purchases you make right at the start of the statement cycle.

Are 0% balance transfers as good as they sound?

There are several financial institutions in the market that offer low or even 0% p.a. balance transfer rates on certain credit cards. This type of offer can be a good way to transfer your balance from a higher interest card to save money and help you pay off your debt faster.

If a balance transfer offer looks appealing, remember to look at more than just the promotional interest rate. Compare the annual card fee and other fees, and factor these into the overall cost of the card. Also note the date the promotional interest rate ends, so you don’t get caught out when it reverts back to the card’s variable purchase or cash advance rate.

If you’re planning to pay off your transferred balance within the promotional period to make the most of the 0% p.a. balance transfer offer, it’s important to be disciplined with your repayments. A Westpac SmartPlan can help you set up monthly installments to help you manage your repayments.

If you’re interested in a credit card, why not compare our cards side-by-side?

Want more information? Learn what a cash advance is and how it works.

Things you should know

Credit criteria, fees and charges apply. Offers are not available in conjunction with any special offers that are not listed on Switches, upgrades or customers accessing employee benefits are ineligible. This information does not take into account your personal circumstances and is general in nature. It is intended as an overview only and it should not be considered a comprehensive statement on any matter or relied upon as such.


© 2016 Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714. The Westpac Group, 275 Kent Street, Sydney, NSW 2000, AUSTRALIA.