How credit card interest works

The interest-free period decides everything

If you pay your closing balance in full by the due date, most Australian cards charge no interest on purchases.

Cards advertise interest-free periods of up to 44 or 55 days. That figure combines the statement cycle with the payment window, so the "up to" is doing real work — a purchase made on the last day of the cycle gets the payment window only.

Pay in full and the purchase rate is a number you never encounter. Everything below applies once you carry a balance.

How the charge is worked out

Interest accrues daily on the balance outstanding, at a daily rate derived from the annual purchase rate, and is charged to the account at the end of the statement period. Because that interest joins the balance, a carried debt compounds.

Daily interest = balance that day × (annual rate ÷ 365)

A practical consequence: when you pay matters. A $500 payment early in the cycle reduces the balance for the remaining weeks; the same payment on the due date reduces it for a day or two.

The credit card interest calculator shows what a carried balance costs at a given rate and payment, and how much of the total is interest.

Cash advances

A separate and considerably worse product sharing the same piece of plastic.

• A cash advance fee, typically a percentage of the amount with a minimum.
• A higher interest rate than purchases.
• No interest-free period — interest accrues from the day of the transaction.

Cash advances include ATM withdrawals, but also gambling transactions, foreign currency purchases at some providers, and buying certain cash-equivalent items. Check what your issuer classes as a cash advance before assuming a transaction is a purchase.

The minimum payment

Typically a small percentage of the closing balance, or a flat dollar floor, whichever is greater. It is set to keep the account current, not to clear it.

Because it falls as the balance falls, paying only the minimum stretches a payoff over many years and costs more in interest than the original debt on a high-rate card.

Australian card statements must carry a minimum repayment warning showing how long the balance would take to clear making only minimum repayments, and what that would cost. It is on the statement because the answer is startling.

Balance transfers

A promotional low or 0% rate on debt moved from another card, for a set period, usually with a transfer fee.

Before committing:

• Divide the balance by the number of promotional months. If that figure is unaffordable, you will still owe when the rate reverts.
• Check the revert rate, which is often the cash advance rate rather than the purchase rate.
• Do not spend on the card. New purchases usually attract the standard rate, and payment allocation means your repayments may not clear them first.
• Keep making at least the minimum — missing one can end the promotion.

Fees to check separately

The annual rate is not the whole cost. Australian cards commonly carry:

• An annual fee, sometimes waived in the first year
• Late payment fees
• Foreign transaction fees on overseas or non-AUD purchases
• Cash advance fees

If the card earns rewards, the cashback calculator will tell you whether the earn rate actually covers the annual fee at your level of spending. Frequently it does not.

If you are struggling

Contact your provider before missing a payment. Credit providers have hardship obligations, and you can request a hardship arrangement — options include reduced payments, deferred payments or reduced interest.

Free financial counselling is available through the National Debt Helpline. It costs nothing, and it is not the same as a commercial debt agreement company. If you cannot resolve a dispute with your provider, the Australian Financial Complaints Authority handles complaints free of charge.