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Published November 23, 2022

How Do Credit Card Interest Rates Work?

A credit card interest rate represents the cost of borrowing money that you don't pay back right away.

Credit card interest is the cost of borrowing money through a credit card company. It’s an extra amount you’ll owe each month if you don’t pay your credit card bill in full. 

Interest is charged to your account on the last day of your statement period, and most banks and issuers calculate credit card interest based on your unpaid balance. 

Many credit cards also offer “interest-free days”, which gives you an additional window of time to repay the amount without being charged interest on purchases. While every bank and product is different, this interest-free period is typically around 55 days.

What is a credit card interest rate?

A credit card interest rate represents the amount of interest an issuer may charge you if you don’t pay your balance in full every billing period. 

When comparing cards, you’ll see interest rates expressed per annum (p.a.), which your credit card issuer might refer to this as the annual percentage rate (APR). Depending on the type of credit card, you could have different APRs for purchases, cash advances, balance transfers and repayment instalment plans.

According to data from the Reserve Bank of Australia, the average credit card interest rate sits around a hefty 19.94%, and it hasn’t changed since late 2019.

How to find a credit card’s interest rate

You can usually find a card’s purchase rate, expressed as a percentage, on the card issuer’s website. Make sure you know the interest rate before applying for a credit card, even if you plan to pay in full every month.

If you already have the card, you can also find it in the app, on your monthly statement, or by calling the phone number on the back of the card and asking the customer service rep. In addition, the rate will surely be in the most recent version of the card’s terms and conditions.

Types of interest rates on credit cards

Interest is charged in myriad ways, depending on how you use the card and what type of transactions you make. 

Purchase rate

A purchase rate, also known as a standard rate, is the main interest rate you agree to when you sign up. It will apply to most regular transactions, such as purchases made online or in a store and bill payments. 

Credit card purchase rates vary significantly, from as low as 8.99% p.a. to as high as 23.99% p.a.

Purchase rates are applied to unpaid balances left over at the end of your statement period or after a set number of interest-free days. You won’t incur any interest if you repay your balance in full before that time.

Cash advance rate

A cash advance rate applies when you withdraw money from your credit card or use it to make cash-equivalent purchases, such as for gambling, money transfers, or loading a travel money card. 

Cash advance rates tend to be higher than purchase rates and rarely benefit from interest-free days.

If you use your credit card to get cash, you’ll be charged interest at the cash advance rate as soon as you make the transaction. You’ll continue to incur interest until you repay the in full.

Balance transfer rate

A balance transfer rate refers to a special low rate — sometimes even 0% — on an amount you transfer from another credit card. That rate applies for a limited period, usually from six to 36 months. After this period, the rate reverts to a higher revert rate, which might be based on the card’s purchase rate or cash advance rate. 

Since balance transfer rates are promotional, they are typically lower than the standard purchase rate. 

Instalment plan rates

Some credit card issuers allow you to use your credit card to take out an instalment loan. This option enables you to finance a major purchase and repay it in smaller amounts over an extended time period.

Instalment rates are usually lower than standard purchase rates. Some providers even offer interest-free instalment plans that work similarly to buy now, pay later services.

» MORE: Should you use a personal loan or a credit card?

How to reduce your credit card interest 

Paying little or no interest is a twofold strategy critical to using your credit card responsibly.

  1. Get your credit in great shape. Improve your power as a consumer when you apply or shop around for credit. Pay your bills on time, set up automatic payments, and only use credit for what you can afford to repay. With a good credit score, you’ll be able to negotiate more effectively with banks.   
  1. Pay your credit card bill in full, on or before the due date. The interest rate becomes less important when you repay your credit card within the interest-free period. Be organised, understand the fee structure, and make your credit card work for you by setting a credit limit that you can realistically pay off every month. Check your credit card statement every week and set reminders on your phone for due dates. 

About the Author

Amanda Smith

Amanda Smith is a freelance reporter, journalist, and cultural commentator. She covers culture + society, travel, LGBTQ+, human interest, and business. Her work has appeared in outlets such as The Guardian, Business Insider, VICE, News Corp, Singapore Airlines, Travel + Leisure, and Food & Wine. Amanda has written stories about planning for retirement for Business Insider, the connection between identity and money for Refinery 29, and the evolving cryptocurrency space for multiple verticals. A keen observer of humans, subcultures, societies and worlds, Amanda's words challenge perceptions and help bridge worldviews. Amanda splits her time between Adelaide, South Australia, and New York City.

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