How is interest charged on credit cards

Hamburger Menu Dialog Open. CommBank Search. Dialog start. Search CommBank. Start typing…. Popular searches. How does credit card interest work? A fixed APR typically remains the same, but it can change in certain circumstances, such as if your payment is more than 60 days late or when an introductory offer expires. Many variable interest rates start with the prime rate, then add a margin.

The result is your variable APR. If you have excellent credit generally scores of or higher , you may be more likely to qualify for a lower interest rate because a credit card company may consider you a lower-risk customer. You can also read your cardmember agreement to learn more about interest rates and fees.

The good news? If you make six consecutive on-time payments, your credit card issuer may be willing to adjust the rate. Your interest charge depends on your balance on each of those days. You start with your unpaid balance — the amount carried over from the previous month.

When you make a purchase, the balance goes up; when you make a payment, it goes down. Using the transaction information on your statement, go through the billing period, day by day, and write down each day's balance.

Once you've got that done, add up all the daily balances and then divide by the number of days in the billing period. The result is your average daily balance. The final step is to multiply your average daily balance by your daily rate, and then multiply that result by the number of days in the billing period. Depending on whether your issuer compounds interest daily or monthly, your actual interest charge might differ slightly from this calculated amount.

Compounding is the process of adding the accrued interest into your unpaid balance, so that you are paying interest on interest. Compounding is the reason you could pay more than your APR in interest. Credit card issuers charge interest on purchases only if you carry a balance from one month to the next.

If you pay your balance in full every month, your interest rate is irrelevant, because you don't get charged interest at all.

Obviously, paying in full is the most cost-effective way to go, but if you usually carry a balance, a low-interest credit card can save you money on interest. Seeing the calculation in action points you to a quick way to reduce your interest charges: Pay twice a month, or more frequently, rather than once.

That extra payment will shrink your average daily balance and, in turn, your interest. Just by paying a little more each month, you could clear your balance sooner than you think, and pay less in interest. Enter your current details into our Repayment Calculator and see the difference a few pounds extra can make.