How Does Credit Card Interest Work? A Guide for Australian Consumers

Understanding how credit card interest works is essential for managing your finances responsibly and avoiding unnecessary costs. With credit cards being a popular method of payment and financing, knowing the ins and outs of interest rates and calculations can empower you to make smarter financial decisions.  

This guide will walk you through the fundamentals of credit card interest, covering key definitions, examples, and actionable tips. By the end, you'll know how to optimise your credit card use and minimise interest charges.  

Note: This article is for general information purposes only and does not constitute financial advice. Please consider whether a product is suitable for your needs before making a decision. Credit card features, terms, and costs vary by provider. Refer to the issuer’s T&Cs before applying. 

What is Credit Card Interest?  

Credit card interest is the cost you pay for borrowing money when you don't pay off your balance in full each month. It’s essentially a fee charged by your credit card issuer for letting you carry a balance.  

For transparency, credit card issuers often present the interest rate as an Annual Percentage Rate (APR), which represents the yearly cost of borrowing. 

Types of APR  

Different types of transactions may incur specific interest rates, also known as APRs. Here are the most common types you’ll encounter:  

• Purchase APR: The interest rate applied to everyday purchases if not paid in full by the due date.  
• Cash Advance APR: A higher rate charged for cash withdrawals using your credit card. Often, this rate applies from the day of the transaction without a grace period.  
• Balance Transfer APR: The rate charged on balances transferred from an old credit card to a new one. Some credit cards offer low or 0% introductory APRs for a limited time.  
• Penalty APR: A significantly higher rate activated if you miss payments or violate your card’s terms, such as exceeding your credit limit.  

What is a Grace Period?  

Your credit card’s grace period is the time between the end of your billing cycle and your payment due date. During this period, you won’t be charged interest on new purchases, provided you pay your full statement balance by the due date.  

If you carry a balance forward, your grace period is effectively lost, and interest on new purchases begins accruing immediately from the transaction date.  

• Example: If your billing cycle ends on the 15th of the month and your payment is due by the 30th, paying in full by the 30th means no interest on purchases made during the cycle.  

How is Credit Card Interest Calculated?  

Credit card interest is typically calculated using the Daily Periodic Rate (DPR) and the Average Daily Balance Method.  

What is the Daily Periodic Rate (DPR)?  

The DPR is your APR divided by 365 days. This rate determines how much interest accrues daily.  

For instance, if your APR is 20%, then your DPR would be:  

• 20% ÷ 365 = 0.0548% per day.  

Average Daily Balance Method  

Most credit card issuers calculate interest using the average daily balance. This method considers your balance at the end of each day during your billing cycle.  

Example:

• Day 1 Balance = $1,000  
• Day 10 Purchase = +$200  
• Average Daily Balance for the month = $1,066.  

Your monthly interest would then be calculated as: 

• $1,066 × 0.0548% × 30 days = $17.50 in interest.  

What is Compound Interest?  

Most credit card issuers apply compound interest, which means you don’t just pay interest on your original balance but also on the interest that accrues. This compounding effect can significantly increase the total amount you owe if you only make minimum payments. 

Example:

• Month 1 Balance = $1,000, with $16.44 interest added.  
• Month 2’s interest will be calculated on $1,016.44 unless you pay off the entire balance.  

Why Only Paying the Minimum is Costly  

Credit card issuers typically set a minimum payment, which is a small percentage (e.g., 2–3%) of your total statement balance. While meeting this payment avoids late fees, the remaining balance continues to accrue interest. 

Example:

• Balance = $1,000. Minimum Payment = $30. 
• If you only pay $30, interest accrues on the $970 remaining balance, potentially dragging your repayment over several years.  

To avoid a cycle of debt, aim to pay the full statement balance or more than the minimum payment each month. 

Penalty Interest Rates 

If you miss a payment or go over your credit limit, your credit card issuer might apply a penalty APR, which is usually much higher than the regular APR. This can make it more expensive to carry a balance. 

How Introductory 0% APR Offers Work  

Some credit cards advertise 0% APR offers for a limited period, often 6–12 months. These deals can apply to purchases, balance transfers, or both, giving you an interest-free window to pay off your balance.  

However, after the introductory period ends, the standard APR kicks in, and interest accrues on any unpaid balance.  

• Pro tip: Use these offers strategically and plan to repay the balance in full before the standard APR begins.  

For more insights, read our guide on The Pros and Cons of Balance Transfer Credit Cards.  

Cash Advances and Hidden Costs  

Using your credit card for a cash advance often incurs higher APRs and skips the grace period. Interest starts accruing immediately, and you may also face additional fees for the withdrawal.  

Example:

• Cash Advanced = $500.  
• Cash Advance APR = 25%.  
• Interest Calculation for 30 Days = $500 × 0.0684% × 30 = $10.26.  

To avoid these steep costs, consider alternatives like tapping into personal savings or a debit card.  

Strategies to Reduce Credit Card Interest  

Follow these tips to keep your interest charges low and better manage your debt: 

• Pay in full each month: This ensures you avoid interest charges altogether.  
• Make payments early: If possible, make payments multiple times per month to reduce the principal amount sooner.  
• Use balance transfer offers wisely: Transfer high-interest balances to cards with lower (or 0%) APR offers.  
• Avoid cash advances: These carry high APRs and fees.  
• Negotiate your rate: You may be able to negotiate a lower APR by contacting your issuer, especially if you have a strong payment history.

Learn more about comparing credit card rewards and cashbacks with our guide on What is Credit Card Cashback.  

Take Control of Your Finances Today  

Understanding how credit card interest works equips you with the knowledge to confidently manage your credit card account and minimise costs. By implementing smart strategies like paying off your balance in full and choosing the right card for your needs, you can make your credit card work for you—not the other way around.  

Start comparing credit card offers at Econnex today and make an informed choice for your financial future.  

Note: Econnex Comparison does not compare all providers in the market. The information provided is general and does not consider your personal objectives, financial situation, or needs.