How does credit card interest work?
Credit cards can be a convenient and safe way to make purchases - as long as you`re confident you can repay the balance within a reasonable period of time. Using a credit card has a number of advantages over debit cards or paying with cash:
- You can buy now and pay later
- You`re better protected against fraud and unsatisfactory transactions
- It`s flexible - you can pay the balance back straight away, or you can pay it back over a longer period.
However, interest rates on credit cards can be much higher than on other forms of credit - so if you do find yourself unable to repay the balance, the interest could become very costly. But used correctly, a credit card can actually be one of the cheapest ways of borrowing money in the short term.
Credit card interest
The average credit card interest rate currently stands at around 18%, compared with personal loan rates starting at around 8%. All things being equal, this means that for every £1,000 borrowed, you`d pay £180 in interest over the course of a year.
Of course, the actual calculations are a bit more complicated than this. But it still stands that for long-term borrowing, credit cards can be very expensive.
However, in the short term, credit cards can often be the cheaper option. When you receive your credit card statement, you`ll be given a date by which you must make a payment. If you only repay part of your balance, you`ll be charged interest on the amount that`s left.
If you choose to pay off the outstanding balance, however, you won`t pay any interest at all. So as long as you only borrow as much as you can pay back each month, you can actually use your card regularly without paying any interest.
There`s nothing wrong with choosing to spread out your repayments and paying interest on your borrowing. But you should think about the overall cost: if you`re planning to repay a big purchase over a significant number of months, it might be more beneficial to take out a personal loan with a lower interest rate. Credit cards therefore tend to be better suited to short-term borrowing.
Compare great credit card deals with our free credit card comparison tool.