How is credit card interest calculated?

Credit card interest is a charge on the outstanding balance of your credit card. So, if you don’t pay your outstanding balance in full by the repayment date each month, you’ll be charged interest. When you carry a balance from one month to the next, interest will be charged on that amount. 

The amount of interest you pay each month can vary and will depend on how much you spend (including purchases and cash advances), how much you repay, when you repay it and your annual interest rate. 

Understanding how credit cards work can help you manage your credit card interest effectively. If you’re able to, paying off the balance in full each month will save you from getting charged interest. 

What is the purchase rate?

The purchase rate is the main interest rate and applies to purchases you make using your credit card. This rate will apply to the outstanding balance if it hasn’t been paid off in full by the repayment due date. This is one of the main costs of having a credit card, so it’s worthwhile considering the purchase rate when you’re comparing credit cards. 

How are card interest rates determined?

Most credit cards have a single purchase rate for all customers. Occasionally you might come across credit cards that offer special introductory rates, that are then followed by an ongoing rate that applies once the promotional period ends.

However, certain factors influence the credit card interest rates, including:

• Type of credit card: Whilst there are different types of credit cards with various benefits, premium and rewards cards tend to have higher interest rates than standard cards.
• Creditworthiness: Customers with higher credit scores may qualify for lower interest rates. Learn more about creditworthiness and how to improve your borrowing power.
• Market conditions: Interest rates can be affected by economic conditions as well as the official cash rate set by the Reserve Bank of Australia, opens in new window.

Different types of credit card interest

Credit cards can incur four types of interest. 

Interest on purchases 

Interest on purchases is the charged when you buy items with your credit card and don’t pay the closing balance by the due date. Your interest on purchases is calculated based on the purchase rate and the amount you owe. 

Cash advances

A cash advance interest rate is applied when you withdraw cash from your credit card. This rate tends to be higher than the purchase rate and interest is charged from the day you make the withdrawal.

Balance transfers

Interest on balance transfers is charged on the amount you move from one credit card to another. The rate is usually lower for a promotional period and once the promotional period ends, a standard rate will apply. Whilst balance transfers provide an opportunity to consolidate debt or move multiple credit cards into one, understanding how balance transfers work can help you make an informed decision.

Promotional interest rates

Promotional interest rates are temporary interest rates offered as part of a promotion. Depending on the promotion, you may be offered a lower rate or even an interest-free period. This special rate can apply to purchases, balance transfers or cash advances. Once the promotional period ends, the standard rate will apply. 

Calculating credit card interest

Credit card interest is determined by various factors, fees and charges. The way your bank calculates interest can vary as well, but here’s how we do it at NAB:

• Determine the daily balance: This is the amount you owe at the end of each day.
• Calculate the daily interest charge: This is done by dividing the annual purchase rate by 365 and multiplying it by the daily balance.
• Add up the daily interest charges: Do this for each day in your statement period to get the total interest charged for that period. 

You can find the specific rates and charges on your credit card statement. 

Example

1. If your annual purchase rate is 18%, the daily interest rate is 0.049% (18% divided by 365). 
2. If the outstanding balance is $1,000, the daily interest charge is $0.49 (0.049% of $1,000). 
3. If there are 30 days in the month, the monthly interest charge is $14.70 ($0.49 times 30).

Can I pay less interest on my credit card? 

Absolutely! There are many ways to lower the amount of interest you pay on your credit card, and maybe even avoid paying interest altogether.

• Make timely repayments: Paying off your balance in full by the due date can help you avoid paying interest. 
• Pay more than the minimum: By paying more than the minimum repayment, you can reduce your outstanding balance sooner and pay less interest.
• Avoid cash advances: Withdrawing cash usually attracts a higher interest rate and does not fall under the interest-free period.
• Switch cards: Do some research on other credit cards with lower interest rates, and if you find one that’s suitable for you, consider switching over – but be mindful of any fees and charges associated with changing cards.

Don’t forget, the key to avoiding credit card interest is to manage your spending and make timely payments. If you're struggling to make your payments, please don't hesitate to reach out to us so that we can help you get back on track.