Everything you need to know about credit card interest rates

16th July 2018

By Kurt Wood

One of the most important attributes of a credit card is the interest rate. It can be the difference between getting a great deal and paying over the odds. Knowing your fixed rate from your variable rate and being aware of any charges is vital when looking after your finances. When looking after your finances.

With so much jargon, it's easy to get confused. Before you decide to apply for a credit card, we’ll explain how to work out your exact cost of borrowing, what to look out for, and where you’ll find the best deals on low-interest credit cards.

The basics of credit card interest

The interest rate is the amount that is charged to you every time you borrow money. It can apply to loans, mortgages and credit cards.

Without considering additional charges and other variables, interest rates are easy to work out. If you borrow £100 with 5% interest, the cost of borrowing will be £5. This means that you will be required to pay back £105 in total.

It’s important to note that borrowing usually incurs other fees and charges, so working out actual interest is often more complicated than that.

How is APR calculated?

The interest on a credit card is represented by its APR, which stands for ‘Annual Percentage Rate’. This refers to the total amount you pay over the course of a year. You can work out your APR by multiplying your monthly rate by 12. For example, if your APR is 24% then you will be charged 2% of your total balance every month.

Not all card users have the same interest rate, which means that your APR could be different than advertised. Cash withdrawals and cash advances often charge much higher rates than store or online purchase. Plus, the APR doesn’t consider any additional fees, late penalties or charges for going over your limit.

There are two main types of rates to consider when shopping for a credit card:

Fixed rates

A fixed APR means your interest rate can only change under very specific circumstances. Your lender will need to notify you in advance before changing your interest rate. With a fixed rate, your interest payments are predictable and stable.

Variable rates

Choosing a variable rate means that your interest will be determined by the market. Your card issuer will not be required to give you advanced notice, so you will need to keep an eye on your statements. Variable rates are unstable and unpredictable, but you could end up paying less than you would on a fixed rate, depending on the state of the market.

What is my minimum payment?

While using your credit card, you’ll receive a monthly bill that shows the total amount you’ve charged to it. The bill will also show you the minimum payment you need to make, which is normally between 1% and 3% of your total outstanding balance.

The thing to remember with the minimum payment is that it is exactly how it sounds: it's the very least you'll pay. While the minimum payment can seem like a good idea when you want to free up your cash for other things, it can be dangerous if you continue to pay only the absolute minimum while continuing to use your card on a regular basis.

If you can afford to, you should pay off the balance in full each month to avoid mounting interest charges.

Am I eligible for low-APR credit cards?

Low APR is attractive, but not everyone is accepted for low APR credit cards in today’s market. Lenders look at your credit score when you apply for a card, and the higher your score, the more likely you are to get accepted.

The three credit reference companies are Equifax, Experian and CallCredit. Each of them offers easy online viewing of your credit score/credit report. Use our handy free credit report service to see how healthy your finances are.

What is an interest-free credit card?

Today’s credit card market has some great deals that help customers save money. The ‘interest-free’ offer of a credit card can refer to different aspects of how a credit card is used, so always know what kind of card you need before you start your application.

Interest-free credit cards most often refer to cards that charge 0% interest on new purchases made with the card. This means that interest is only charged if you do not pay off the full amount when your bill arrives.

You may also hear about 0% balance transfer cards. These work a little differently: while they charge interest on new purchases made, they don’t charge for any debt that you transfer over from a different credit card.

Whichever card you go for, it will only offer interest-free for a specific amount of time - usually between six months and three years. The length of the interest-free period will always be clearly stated when you’re browsing for deals.

Credit card APR advice

When shopping around for credit cards, there are a few key things you need to think about. Here are some tips to help you shop effectively for the right interest rates and deals on the market.

Don’t be fooled by ‘typical’ APR – ‘typical’ or ‘representative’ APR can be misleading. These rates are based on 51% of the nation, meaning that the other 49% that apply won’t be offered the rates as advertised. Be aware that the real APR will vary based on your personal finances.

Check whether it’s fixed or variable – credit card interest can either have a fixed or variable rate, so always check before you apply. If you choose a variable rate, make sure you pay attention to your statements to see if the rate has changed.

Low APR isn’t always the best deal – the lower the APR, the less interest you will pay. But there are other deals to look out for, such as reward schemes, cashback deals or 0% interest periods.

Try calling your bank – if you are a loyal customer, your bank may consider lowering your interest rate for you. Give them a call and see if it’s possible to get a better offer.

Find the best interest-free credit cards online

The best way to shop for credit cards is by using a credit card eligibility calculator. Eligibility calculators are free and easy to use and can provide a better picture of your chances of being accepted by different credit card providers. This reduces the possibility of rejection and, because only a ‘soft search’ is conducted, it will not affect your credit rating.

Compare credit cards online with our free comparison service to find the best deals on the market right now and choose a card that’s right for you.

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