Credit card interest is usually based on your balance and the card’s annual percentage rate (APR). The provider may calculate interest daily, using the balance on each day or an average daily balance, then add the accumulated amount to your account at the end of the statement period.
For an illustration, suppose a card has a £1,000 balance and an annual rate of 24%. A simple monthly estimate is:
The actual charge can differ because providers use daily calculations, the balance may change during the month, and the APR may include different components. Cash withdrawals and fees can also be treated differently from purchases.
A minimum payment normally covers interest, fees and only part of the amount borrowed. If the balance is £1,000 and the monthly interest is about £20, a £50 payment initially reduces the balance by roughly £30. Interest in later months is then calculated on the remaining balance, provided no further spending is added.
New purchases, missed payments and fees can slow the reduction. Some cards also offer an interest-free period for purchases when the statement balance is paid in full, but that benefit may not apply if a balance is carried from month to month. The card agreement explains the provider’s rules.
Interest is charged separately on each card. For example, three balances of £1,000 do not necessarily cost the same as one £3,000 balance, because their rates, fees and payment arrangements may differ. Adding the interest charges from each statement shows the total monthly cost.
Updraft’s balance view can help people compare what each connected balance is costing, alongside the amount owed. A payoff calculator can then show how changing the payment affects the estimated time to clear the balances.
Paying more than the minimum generally reduces the balance faster and lowers future interest. Directing additional money towards the balance with the highest interest rate usually minimises the total interest paid. Paying the smallest balance first can provide a quicker visible result, although it may not produce the lowest overall cost.
A balance transfer or fixed-term loan can also change the calculation, but the comparison must include transfer fees, arrangement fees, promotional periods, the total amount repayable and what happens when a promotional rate ends. A lower monthly payment does not necessarily mean a lower total cost. Balances must also be cleared rather than replaced by new borrowing for the expected saving to occur.