Understanding Credit Card Interest
Credit card interest can get overwhelming, especially if you don’t know how it works. Understanding how and when interest is charged and how to calculate can help you feel more confident when it comes to your credit, and may even help you claim offers such as interest free periods.
The key takeaway in this guide is that the way interest works on your card may depend on your lender, and the type of credit card you hold. After reading this article, be sure to refer to the terms and conditions of your card or have a chat to your lender if you have further questions.
Are you interest-ed? Let’s dive in!
How does credit card interest work?
When you make a purchase using your card, it gets added to a statement. Usually, you’ll be required to pay the expenses on your statement either at the end of the month or the end of the following month.
If you’ve claimed an offer giving you an interest free period, you may have a bit more time to pay this off. If you don’t pay off your expenses by the agreed time, they’ll start accruing interest. We’ll talk more about interest free periods a bit later on.
If you meet the minimum repayment amount at the end of your statement period you usually won’t have to pay additional fees, but your outstanding expenses will still accrue interest.
Interest will usually be applied to your outstanding purchases at the end of each day they are overdue. Because of this, credit card interest can really start piling up, so its important to keep track of your expenses and make sure you can pay them off before interest starts getting charged.
How do you calculate credit card interest?
Once you know how the interest on your card works, you can start calculating it. Let’s say you haven’t been able to pay the expenses on your statement before the due date, and now you have an outstanding expense of $1,000 accruing interest. Most lenders will charge interest on the outstanding amount of the closing balance following the due date for payment until it is repaid in full.
Subject to any interest free period, interest is calculated by applying the daily percentage rate, which is the annual percentage rate divided by 365 to the outstanding balance on your account at the end of each day.
Why don't we work through some examples together?
If our annual percentage rate is 12%, our daily percentage rate will be 12% divided by 365, which gives us a new rate of 0.0329%.
Now, let’s apply this daily rate to our outstanding balance of $1,000. 0.0329% of $1,000 is about $0.329, or 33 cents. While this may not seem like much, this will be charged for each day that your balance remains outstanding, so it can really start piling up.
If you had an outstanding balance of $5,000, you’d be charged about $1.65 for each day it is outstanding. In another month, this charge would accumulate to around $49.50.
If you have multiple debts, your repayments will normally go toward paying off the expense accumulating more interest. If we have a charge of $1,000 and $5,000, the $5,000 charge will usually be paid off first, as it accumulates more interest.
If you only ever pay the minimum repayment amount, it can take a long time to pay off your expenses plus the interest they've accrued.
Paying off credit card debt isn't easy, but if you were interested in a few tips you can take a look at one of our guides.
How do interest free credit cards work?
Many lenders offer an interest free period, which is normally up to 55 days from the start of your statement period. During this period, you won’t have to pay interest on purchases you make, but once the period ends, you’ll have to repay your balance in full on the statement due date. If you don’t, those purchases will start accruing interest.
Most lenders offer an interest free period as long as you pay the full balance shown on your statement each month. If you only meet the minimum repayment amount, you normally won’t be eligible for an interest free period.
If your statement period is normally only 30 days long, fulfilling the criteria to receive an interest free period may be worthwhile as it gives you a few extra days to pay off your expenses.
Do credit card interest rates change?
Yes, credit card interest rates can change. Many lenders apply a variable interest rate on purchases, which means that the interest rates can change from time to time. There are many reasons that may cause your interest rate to change, such as you or your lender agreeing on making changes to your contract, or even external factors such as decisions the RBA makes surrounding the Cash Rate. Your lender will let you know if your interest rate is going to change, via an announcement and on your next statement.
When do I get charged interest on my credit card?
If interest applies, it will be charged to your account after your statement period ends. Even if you meet your minimum payment required, you can still be charged interest if you haven’t repaid your outstanding balance in full by the statement due date.
Most statement periods last for 30 days, or may start on the first of the month and end on the last day of the month. If you are currently in an interest free period, you may be given up to 55 days to pay off your expenses instead of 30.
What are the current credit card interest rates?
Interest rates vary between lenders and across different types of cards, but you can check out Greater Bank’s credit card interest rates on our website.
Keep in mind that different interest rates may apply to your card depending on the type of expense is made. For example, you may be charged one rate for purchases you make, and a different rate on balance transfers or cash advances.
Are business credit cards tax deductible?
Not all expenses on a business credit card will be tax deductible. Personal expenses made on a business credit card won’t be considered tax deductible. However, purchases made for business or work reasons may be tax deductible.
A proportion of the annual fee charged on your credit card may be tax deductible, depending on how you use your card. For example, if 75% of the purchases you make on your card are for business purposes and 25% for personal purposes, you may be able to claim 75% of the fee. If only 25% of the purchases on your card are used for business expenses, then you can only deduct 25% of the fee.
Be sure to refer to the ATO's website for more information about tax deducting.
This article is intended to provide general information of an educational nature only. This information has been prepared without taking into account your objectives, financial situation or needs. Therefore, before acting on this information, you should consider its appropriateness having regard to these matters and the product terms and conditions. Terms, conditions, fees, charges and credit criteria apply. Information in this article is current as at the date of publication.