Interest Rates Explained

You hear talk of APR, of low interest rates - but what does it all mean? How much money are you going to end up paying the credit card company and how can you minimise this... or even get round it?

Student Tip improving your credit rating can lower the amount of interest you pay on credit.


APR is the 'Annual Percentage Rate'. Credit card companies charge you interest every month on the balance of your account depending on your purchase transactions, cash withdrawals etc. If you multiply the percentage they charge you every month then you get an amount (APR) that you are paying each year.

What am I paying each month?

The interest charge varies from one credit card company to the next but generally falls between 0.8% and 2% per month (this is an APR of 9.6% - 24%).

Example: You have a balance of £1000 at the beginning of the month, and make no purchases etc. Charges for that month will range between £8 and £20. If you leave your credit card for a whole year without any changes to the balance you will have ended up paying between £96 and £240 in interest alone!!

These figures are different from your minimum payment - which will take into account the interest + paying off a small amount of the total sum owed.

Other things to know about Interest Charges

Interest rates are different for different uses of your card. If you use your card to buy something in a shop you will get charged a certain rate of interest. If you withdraw money from a cash machine using your credit card you will get charged a different (usually higher) rate of interest.

You will always have to pay interest on cash withdrawals and other money transfers. See below to find out how to avoid paying interest on your purchases.

How can I keep my interest payments down?

a) Pay your outstanding balance by the due date (max 52-56 days after the purchase, minimum 21-25 days)
b) Try to avoid making cash withdrawals and doing other money transfers with your credit card.
c) Take advantage of interest free balance transfers on credit cards and move your debt around.

If you regularly pay your whole outstanding balance by the due date you will not get charged any interest on any purchases. Some credit card companies say "up to 56 days interest free". What they mean is that if you buy something on the first day of the new period then you have that whole month, plus 25 days to pay it off to take advantage of the no interest offer.

Cash withdrawals using credit cards are expensive! Interest rates are higher on these withdrawals are higher and there is no way of getting round them. Added to that, credit card companies levy a charge for a cash withdrawal (ranging from 1.5% - 3%). Try to avoid getting cash out!

Now one of the best way of getting round interest charges is by moving your money between credit cards. Most of the credit card providers have interest free balance transfer offers - use them wisely! If you have £2000 outstanding on a credit card, find another one that gives you 5-6 months interest free on balance transfers and move your debt. On £2000 this could save you between £96 and £240. Just watch out for % balance transfer fees for moving your money between cards. Often these around 2 - 3% so depending on the amount you are moving, can add up, but do your calculations first and transferring your balancer can still be a wise idea.

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