How credit card interest works

A card advertised with up to 55 interest-free days is not offering 55 days on every purchase. The number is the maximum, and it is made up of two parts: the statement period, usually around 30 days, and the payment window between the statement date and the due date, usually around 25 days.

A purchase made on the first day of the statement period gets the whole statement period plus the whole payment window, so close to the advertised maximum. A purchase made the day before the statement closes gets the payment window only, which is roughly 25 days. Same card, same feature, less than half the benefit, decided purely by timing.

The condition attached to all of it is the one that matters. Interest-free days apply only where the closing balance shown on the statement is paid in full by the due date. Paying most of it does not earn a partial concession. On the majority of Australian cards, an outstanding balance at the due date means interest applies to purchases in that statement period, and typically continues to apply until the balance is cleared in full again.

Credit card interest is calculated daily and charged monthly. The provider takes the annual purchase rate, divides it by 365 to get a daily rate, and applies it to the balance outstanding at the end of each day. Those daily amounts are added together and appear as one interest line on your next statement.

The detail that surprises people is the start date. When you fail to pay in full, most providers charge interest on each purchase from the date of the transaction rather than from the statement date or the due date. A purchase made six weeks ago has been accruing for six weeks, and the charge lands all at once. That is why a first interest charge frequently looks far too large for the balance carried.

Two rates commonly sit on the same card. The purchase rate applies to everyday spending, and a separate, usually higher, cash advance rate applies to cash-like transactions. Any promotional rate, such as a balance transfer offer, sits on top as a third bucket with its own rules and its own expiry.

Where payments go matters as much as the rate:

• Payments are applied to the highest-rate balance first. Australian law has required this on card accounts opened since 1 July 2012. That works in the cardholder’s favour when a card carries both a purchase balance and a cash advance balance.
• Promotional balances are not always the highest rate, so a balance transfer sitting at 0% can be the last thing your payments touch while the promotional period runs down.
• Interest itself is not interest-free. Once charged, it forms part of the balance and accrues alongside everything else.
• Fees behave like purchases. An annual fee posted to the account is part of the closing balance, and leaving it unpaid can cost you the interest-free concession on everything else.

A cash advance is treated as a different product to a purchase. Interest starts on the day of the transaction with no interest-free period at all, the rate is typically several percentage points above the purchase rate, and a fee applies immediately, usually a percentage of the amount with a minimum dollar figure.

Withdrawing cash from an ATM is the obvious case. The expensive part is the list of transactions that are classified as cash advances without looking like one, and that list differs between providers.

Commonly treated as cash advances:

• Cash withdrawn at an ATM or over the counter, in Australia or overseas.
• Gambling transactions, where a card still allows them. Online wagering providers have been banned from accepting credit cards since 11 June 2024.
• Buying foreign currency, travellers cheques or gift cards.
• Transfers from a credit card to a bank account, and some BPAY payments.
• Cryptocurrency purchases, which most Australian providers now classify as cash-like.

The minimum repayment is usually the greater of a small percentage of the balance, commonly 2% to 3%, and a floor of $20 to $30. It is designed to keep the account current, not to clear the debt. When the percentage is close to the monthly interest charge, almost nothing comes off the balance.

Australian statements are required to show how long the balance would take to clear if you paid only the minimum, along with the total interest that would cost. It is the most useful box on the page and the most frequently ignored.

In rough order of how much they change the cost:

1. A fixed direct debit for a sustainable amount, rather than the minimum. It converts an open-ended debt into one with an end date.
2. Clearing the balance in full once, which on most cards reinstates the interest-free concession on future purchases.
3. A balance transfer, which only clears a large balance if it can realistically be repaid within the promotional period. Our balance transfer guide covers the revert rate and the traps.
4. The purchase rate. Rates across the Australian market vary by more than ten percentage points, and a low-rate card carrying a balance is a different product to a rewards card designed for people who pay in full.
5. A lower credit limit. Providers must not increase a limit without the cardholder’s consent, and a reduction can be requested at any time.
6. Hardship arrangements. Providers are required to consider them when repayments become unmanageable, and more options are open early than after missed payments.

The underlying point is that a credit card is two products wearing one piece of plastic. Used as a payment tool and cleared in full, the interest rate is irrelevant and the interest-free days are genuinely free. Used as a borrowing tool, it is one of the more expensive forms of consumer credit available, and the features that make it attractive in the first mode do nothing for you in the second.