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How interest rates work with credit cards

Credit cards are easily accessible to most Australians. Those little plastic cards allow people to buy anything within their credit limit, making the purchase of big-ticket items easier as long as minimum payments are made regularly.

Consumers acknowledge this and agree to pay for their debt and any applicable interest applied to it when they sign the credit card contract. When consumers fail to meet the minimum repayments multiple times, the initial debt could get slapped with compound interest and the debt could balloon.

How can you determine a credit card’s interest rate?

Finding a credit card’s effective interest rate is fairly straightforward.

Different creditors and card types offer different interest rates. A credit card’s interest rate is usually indicated in the “Credit Card Key Facts Sheet” that issuers are required to provide applicants under the National Consumer Credit Protection Act 2009, which is administered by the Australian Securities and Investments Commission (ASIC).


ASIC offers a free credit card calculator to help consumers work out how much they’ll end up owing and paying in interest with their card. Other sites also offer free comparisons of credit card interest rates.

Credit card interest rates explained

Credit cards have varying interest rates depending on the issuer, type of card and transaction involved. Rates typically range from 11 to 20 per cent per annum (p.a.) and rewards cards are usually on the higher end of the scale.

According to Finder’s State of the Credit Card Market Report 2017, the average credit card interest rate is at 16.97 per cent based on the average balance of $1,903 accruing interest.

How do interest rates work on credit cards?
Notice that the interest rate range indicated above is “per annum”. This is usually how issuers show credit card interest rates because it’s how the interest adds up annually. However, interest rates are not applied to debt annually but on a daily basis.

This is where compound interest comes in, driving consumers deeper in debt.

What is compound interest?
Compound interest is when interest is added to the principal debt and the next interest is applied to this new amount. Repeat until the debt is paid off.

Consider this: Dan owns a credit card with a 20 per cent interest rate p.a. (0.0548 daily) and uses it to buy a $300 pair of sports shoes. If he only makes a minimum repayment of $7 for his purchase, he would only be able to pay off his original $300 debt in full after 13 years and two months. The total payment will amount to $818, with $518 making up for the interest that compounded over time.

Can you negotiate credit card interest rates?

Responsible consumers who have a good track record of paying their credit card bill on time may negotiate a lower interest fee from the card issuer. All they need to do is pick up the phone and ask for it.

Before calling up your issuer, however, research different credit card offers that you are eligible for. Once you have compiled a list of ideal offers, you can call your issuer and negotiate to match the offer or end the contract.

According to professionals, banks and other creditors spend more money attracting new customers than retaining them, so the chances of the issuer agreeing to meet their clients halfway are high.

How to reduce interest rates on credit card debt
Unfortunately, once a consumer has existing credit card debt, that amount is already subject to the interest rate they agreed to. If borrowers can’t afford to meet the repayments, however, they may contact their creditor to ask for a hardship variation and draw up a new debt repayment agreement for the amount.

They may also consider applying for a zero per cent balance transfer card, which can help them pay off the balance without accruing interest in a specified period. Sometimes, the original creditor may even try to match or outdo the balance transfer card’s offer.

Different credit cards apply different interest rates. It’s important to read the key facts sheet and compare various offers before applying for a specific card.


How interest rates work with credit cards
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