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Credit Card Interest

Did you know that if you had two different cards with the same rate you could still end up paying more on one?”

This is one of those topics that can be a bit eye watering, but it pays to get to know this area and just a little knowledge can make a difference.

If you withdraw cash from an ATM using your credit card or don’t pay off your balance in full every month you’ll be charged interest.

But did you know that if you had two different cards with the same rate you could still end up paying more on one, just because of the way that the interest is calculated?

And if you do withdraw cash this is usually charged at a higher interest rate (the cash withdrawal rate) and it is likely that you’ll be charged from the day you take the money out. You will also be subject to a typical handling fee of 1.5% of the amount drawn.

Take the Time to Compare Rates and Charges

Providers charge interest on transactions at different times. Some cards charge from the moment you buy something, others wait for a few days until they actually pay the retailer (for instance) for your purchase.

Another example is if you take cash out on your card but repay your balance, (which may be a combination of purchases and cash withdrawals) in full. You will be charged interest on the cash withdrawals. Some providers charge interest up to the date that the bill is issued. Others, however, charge interest until they actually receive the payment.

In both cases a few days extra interest can make a real difference at the end of the year.

If you only pay the minimum or part of your balance the interest you are charged is added to your bill. To continue to pay minimum or part payments will incur more and more interest, making the final price you paid for your card purchases more expensive.

Become Familiar with the Jargon

The APR (annual percentage rate) determines what interest you’ll be charged on any balance left outstanding at the end of the month. These rates vary considerably from 0% to anything upwards from 20% or even 29% so it is important to get a card with the best APR, depending on your spending habits.

If you have a small balance that you’ll be able to pay off in a finite amount of time it is worth considering a 0% interest credit card. Do bear in mind that most card providers charge a fee if you are transferring the balance, even on 0% interest. It can still be worth transferring however, especially if you can clear the balance in the allotted offer period.

If you miss a payment your provider may forfeit the interest free period, leading to extra charges. The most efficient way to avoid this is to set up a direct debit.

Late Fees

If you don’t make the minimum payment in time you may be charge a late fee, which can range from £10 to £25 so it is important to set up a direct debit.

Annual Charges

Some credit cards have an additional annual charge or fee, which is something to take into consideration when choosing a card.

What’s your Credit History?

Quite often, banks and credit card companies use credit history to set interest rates on a credit card. So people with a poor credit history might be offered a higher rate while someone with a good credit history will receive a cheaper rate.

Take a View

• Interest is charged on any balance left on the card at the end of the month.

• Interest is charged on any cash withdrawals as well as a fee on the amount withdrawn. This even applies if you pay your bill in full at the end of the month as cash withdrawals are treated differently.

• The ways that credit card providers calculate interest varies and can make a difference to the amount you pay over time.

• Check out the best APR as this impacts any balance left unpaid.

• Read the small print to see if your provider charges an additional annual fee.

• Don’t leave paying to the last minute and risk getting charged a late fee. Setting up a direct debit is a good way round this.