Confused about credit card interest? *nods* Here's the low-down.

By Charlotte Yau

Every credit card has an interest rate attached to it and it’s always important you understand what they mean for you.

Getting credit almost always involves a fee or charge for that credit, usually called interest. The rate and term of interest is set by the company supplying the credit so can vary greatly depending on the product. The rate of interest can also be dependent on the applicant’s credit history – those with a fantastic credit history normally get a very low rate, even 0% on some credit cards, while a new applicant or someone with a worse history will pay more.

What actually is interest?

Interest is the cost for borrowing money, it’s basically a payment to the lender for giving the applicant an upfront sum. It’s always expressed as a percentage which is usually based on borrowing over a whole year. Even though it is calculated over the year, it is charged weekly or monthly and is displayed on a statement.

Credit card interest

Credit card interest is applied on any purchases made using the card, not on the total amount available; so if you’ve purchased one hundred pounds’ worth of goods you’ll only pay interest on that, not available credit limit.

Keeping on top of your interest

In order to keep on top of your credit card interest it is always best to clear off an entire balance, this minimises the amount of interest paid, with some credit cards offering 0% or a very low rate on purchases that are paid off within a set period (30 days normally). If you only make the minimum payment, you are basically paying the interest that has accrued that month and not clearing any of the balance. Interest is then applied to that balance on the following month which may be greater if you’ve done any further spending.

For example,

You spend £100 and your interest is 5% on all purchases. Your statement comes through, you don’t clear off the balance which is now £105 and instead you meet the minimum repayment amount of £5. The next month you add an extra £50 to that balance so it’s now £150 with 5% interest added on making it £157.50. If this goes on for a full year you’ll have soon built up a fair amount of debt, but having paid nothing off of the actual balance.

Be aware of

APR and interest rate are not the same thing. APR is based on your monthly interest rate plus any fees for having the card, which some lenders may levy, therefore the APR is the annual cost of the credit card to you as the borrower (including all fees).

Not meeting your repayment agreement may also mean you are charged a late fee on top of your interest. You can then end up paying interest on that late fee!

Finally, shop around for a credit card which will personally benefit you as a consumer. Many cards offer schemes including reward points, cashback, air miles and discounts with restaurants among many other benefits and bonuses. You might find that these benefits outweigh, for example, a slightly higher interest rate or an annual fee, if you are going to make enough use of that specific benefit. For example,  with an American Express Preferred rewards gold card, if you spend £2000 in your first three months, you can earn enough points to get 2 free short haul flights. That sorts out the romantic getaway or the boys weekend away.

Top takeaway

Above all, make sure when taking out a credit card you go for one that provides the maximum benefit for you at the lowest possible cost and make the most of an opportunity to build your credit rating.

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