How does credit card interest work?

Credit cards can be really handy. Whether you're putting down a deposit for a holiday, using one to help pay for a deposit on a new car, or to manage everyday spending - they offer flexibility when you need it. The key is understanding the type of borrowing that suits you and how to manage it wisely, helping you stay in control and confident with your money.

Understanding credit card interest, when it applies, and how it’s calculated will help you manage your finances and help you to use your credit card effectively. Read on to learn about interest rates, credit card payments, and how to minimise potential charges on your credit card. 

What is an Interest Rate and APR?

APR gives you an estimate of how much borrowing money on a credit card will cost. APR stands for ‘annual percentage rate’ and is designed to show an annual cost of credit including interest and other charges.

Your credit card's APR (Annual Percentage Rate) represents the overall cost of borrowing when you carry a balance (when you have made a purchase using your credit card), it includes your interest rate and any additional fees. An understanding of APR can help you compare credit card costs.  

The APR and interest rate are based on factors like your credit history and the type of card you have. A lower interest rate means you pay less interest back on outstanding balances, so it's always a good idea to explore your options and find a card that works best for you.

You may also have a different interest rate for different types of transactions or ways that you use your card. This may include:

• Purchase rate: What you’ll pay when you buy goods and services on your credit card, if you haven’t cleared your balance before your payment due date
• Balance transfer rate: After transferring a balance from another credit card onto your balance transfer card, you’ll typically have a set amount of time to pay it off at a set interest rate. If you still owe money after that period has ended, you’ll often have to pay higher interest on the remaining balance. There may also be fees associated with transferring your balance, so check your terms and conditions for more information
• Cash transaction rate: If you use your credit card to withdraw cash from an ATM, you’ll typically need to pay a different interest rate for that balance as well as an additional fee

As well as interest and APR, there could be other fees and conditions associated with different types of credit cards. For more information on how this may look for you, check out our guide on how credit cards work.

Our Eligibility Checker makes it quick and easy to see if you're likely to be accepted without affecting your credit score.

What is the Impact of Paying the Minimum Payment 

When you have a credit card, you’ll need to pay off part of your balance each month. The smallest amount you’re required to pay is called the minimum payment, and this can vary each month based on your balance.

It’s important to pay at least the minimum by the due date to avoid late fees, losing any special offers, and potentially hurting your credit score.

If your balance continues to be charged interest over time, this means you will continue to pay higher interest fees and increase the total amount owing on your credit card. If you want to pay off your balance faster and avoid interest, it's a good idea to pay more than the minimum whenever you can.

Balance Transfers and Interest

A balance transfer credit card allows you to move existing debt from one card to another. Balance transfer credit cards often come with a promotional low or no-interest period, which is designed to help you pay off your outstanding balance more quickly.

The terms and conditions of balance transfer cards vary, depending on the type of card you have, so be sure to check yours. Generally, during the promotional period, you’ll pay no or low interest on your balance as long as you keep up with regular repayments.

If you miss a payment, make a late payment, or don’t pay the minimum amount, the promotional period may end and your remaining balance could be subject to standard APR.

Similarly, if you don’t pay off your outstanding balance before the promotional period ends, your remaining balance will be subject to standard APR, which might be significantly higher than the promotional rate. Why not set a reminder in your calendar to let you know when your promotional period is due to come to an end?

The card the balance is being transferred to will often charge a fee. It’s important to have a good understanding of the terms associated with your balance transfer card so you can make sure it’s an affordable solution for you.

How to Minimise Charges 

When managing your credit card, look for ways to minimise interest charges as much as possible. You can do this by:

• Regularly viewing and reviewing your statements to track spend and interest
• Setting up a Direct Debit to make regular and affordable payments
• Taking advantage of promotional low-interest offers and looking for credit cards that offer a low interest rate, such as our Advance Credit Card 12.9% APR representative (variable)
• Keeping track of your spending and adjusting your budget when you notice your balance is getting higher
• Avoiding activity that has a higher APR, such as cash advances or other types of spending your card is not designed for

Use our Credit Card Comparison tool to explore different types of credit cards and get an idea of which one might be a good fit for your needs.

In Summary

Understanding how credit card interest works is important and will help keep your finances healthy. Make sure to understand how your interest rate works and what your interest rate is, for different types of transactions. Remember to set up a Direct Debit to make regular and affordable payments. Paying more than the minimum amount can help customers avoid a situation where fees and charges grow faster than the amount they owe. This will help you to stay on top of your spending and help you stay in control of your balance, so you can feel confident using your credit cards and managing your money.

Read more on Understanding Credit Card Balance.

For more information about how credit card interest works and which credit card might be best for you, get in touch with our Money Confidence Experts.

18+ and UK resident only. Lending is subject to approval. Credit limits, promotional periods and interest rates will vary based on your individual circumstances. To remain eligible for promotional rates you must stay within your credit limit and make your payments on time each month.

Representative 30.95% APR (variable). The representative APR is the Annual Percentage Rate of charge. You can use it to compare the overall cost of credit between different lenders.

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