If you pay off your credit card bill in full every month you won’t pay interest. But if you don’t pay it off in full you will be charged interest. The interest rate can vary depending on the card and what you’re using it for. Find out how the costs can add up.
How credit card companies maximise their profits
Credit cards normally charge different interest rates depending on what you use them for. You can pay as little as 0% for balance transfers, but well over 20% for taking out cash. Here’s a guide to the different rates of interest you may be charged:
1. Taking cash out with your credit card. You’ll be charged the highest interest rate when you use your credit card to take out cash at a machine. This can be over 25%.
SAVVY TIP: What makes this interest rate even more expensive is that you’re charged interest from the moment you take the cash out. Even if you pay off your credit card bill in full at the end of the month, you’ll have been charged interest. This is different to what happens with purchases, where you normally have up to 56 days interest free (the number of days depends on the card) before you are charged interest – as long as you pay off your credit card in full.
2. Purchases. You’ll be charged a slightly lower interest rate when you use your card for purchases. This could be anything from 0% (if your credit card has a 0% interest on purchases deal) to 19% or more.
3. Balance Transfers. You may be charged 0% interest if you transfer your balance from one card to another, depending on the deal you sign up for. Some card companies offer balance transfer deals that charge 0% interest for up to two years, others offer cards that charge a low rate of interest for the life of the balance (ie as long as it takes you to pay off the balance).
How your debts are paid off
If you don’t pay off your credit card bill in full every month, your credit card company will pay off your debts using what’s called a ‘positive order of payments’. This means that the most expensive deal is paid off first. This means if you have a 0% balance transfer and use the same card that charges for purchases to shopping, your payment goes to clear this more expensive debt first.
How you may be caught out
Some ‘purchases’ may be charged a higher interest rate – namely the same interest rate you’ll pay if you take out cash. These transactions include:
- Foreign currency. If you buy foreign currency you are normally charged the cash withdrawal rate of interest.
- Gambling. This can include scratch cards, online poker and lottery tickets as well as buying something in a casino (not just playing a game, but buying drinks or snacks).
- Making an electronic transfer. If you transfer money from your credit card to your bank account to make a payment, that’s classed as a cash withdrawal.
SavvyWoman email newsletters: If you found this information useful why not sign up now to receive free fortnightly email newsletters with money saving tips and help? You can sign up at the top of any page on the website and your details won’t be passed to any other company for marketing purposes.