How credit card interest is worked out

From the APR to a monthly and daily rate

Your statement shows two rates. The yearly interest rate (often marked “p.a.”) is the one interest is actually charged at. The APR is the yearly cost once each month’s interest is itself charged interest month after month, plus any fees the card charges automatically, which is why it’s a little higher. Card adverts quote a “representative” APR, so the rate you’re offered can be different.

Here’s how one rate leads to the others, for a card at 24.9% APR:

The last row is how most card providers work it out: each day’s balance times the daily rate, added up over the statement period. That’s why a real statement can differ from a monthly sum by a few pence, and why a statement period with more days in it costs a little more.

Work out the interest on your own card →

When you pay no interest at all

Most cards give an interest-free period on purchases. If you pay your full statement balance by the due date, you pay no interest on what you bought, which can mean up to 56 days without interest from the day you buy something.

The catch is what happens if you don’t. Pay less than the full balance, even by a small amount, and interest on purchases is usually charged from the day you made them, not from the due date. Many cards also need you to have paid in full the month before to get the interest-free period at all.

Why cash costs more

Taking cash out on a credit card is treated differently. There’s usually no interest-free period, so interest starts on the day you take the money out, even if you pay the full balance by the due date. Cash often has its own, higher rate, and a fee on top: one major card charges 2.5% of the amount or £3, whichever is more. Buying foreign currency is often treated as cash too.

Where your payments go

Your payment pays off that month’s interest first, and only the rest comes off what you owe. On £3,000 at 24.9% APR, a £150 payment puts £56.10 towards interest and £93.90 towards the balance. As the balance falls, so does the interest, and more of each payment comes off what you owe. Over the first year, paying £150 a month:

If parts of your balance have different rates, such as purchases and a 0% balance transfer, your payments go to the part with the highest rate first. That works in your favour, but it also means new spending on a 0% card gets paid off before the 0% balance does.

Paying less interest

Pay a fixed amount, above the minimum. The minimum is mostly interest, so the more you pay above it, the faster the balance, and the interest on it, falls.

Move the balance to 0%. A 0% balance transfer stops the interest for a set time, usually for a one-off fee. Moving £3,000 from 24.9% to 12 months at 0% with a 3% fee, paying £150 a month, saves £573. The balance transfer calculator works it out for your own deal.

Stop adding to it, and avoid cash. New spending pushes the balance back up, and cash is charged interest from day one.

Clear the most expensive card first. With more than one card, pay the minimum on each and put anything extra towards the highest rate.

Getting help

If the interest is making it hard to keep up, talk to your card provider early: it has to treat you fairly and consider what you can afford. Free, confidential debt advice is available from MoneyHelper, StepChange, National Debtline and Citizens Advice.