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Last updated: 23/07/2020 | Estimated Reading Time: 3 minutes

Credit cards and interest rates

When you’re applying for credit cards, the first thing you should be thinking about is interest rates. You’ll want to make sure that you’re getting the best rates available and this will involve being clued up regarding how card issuers work out the rates they charge.

We’ll give you a basic explanation of credit card interest rates and how they work so that you can be sure that you’re getting the best deals when you apply.

In This Guide:

What is APR and how does it work?

APR stands for annual percentage rate, and is the basic way in which credit card issuers work out how much it will cost you to borrow money.

If your card comes with an APR of 24%, then that means that if you spend £500 and don’t pay it back for a year, you’ll be charged £120 on top of what you borrowed.

Importantly though, if you pay it back sooner, you’ll pay less interest. Continuing from the above example, if you pay back the £500 balance after six months, you’ll only pay back half of the annual rate, which would come to £60 (12% of the £500).

The APR quoted is only a rough figure though not only will the rates be slightly different for different customers depending on their credit rating, but also it does not take into account compound interest, which we’ll explain in the following section.

Getting the best interest rates

When credit cards are advertised, the APR you’ll see quoted is what is known as the representative rate. The actual rate you’re offered might differ slightly from the rate advertised depending on your credit rating.

The best way to get the best interest rates on your credit card is to improve your credit score. Some cards come with APRs up to 39.9% and some with as little as 10% or even lower. To get the lowest rates, you’ll need a near perfect credit rating.

If your credit rating isn’t great, you might want to consider taking out a specialised credit building card, designed to help you improve you credit score as you use it.

Another thing to look out for is whether or not your card of choice will charge compound interest, that is, interest on top of interest. Most card issuers will charge compound interest, but you should always check with your provider to make sure.

Regardless of how good your credit rating is, you should always shop around online to see what kind of deals you could be getting. Head over to our credit card comparison page to see the best cards with the best APR in each category.

Purchase rates and cash advances

Generally, the APR quoted for each card only applies to purchases made, rather than cash withdrawn.

Using your credit card to make a cash advance normally comes with much heftier rates and charges and so you should really only do so when it is absolutely necessary.

Where possible, you should stick to making purchases with your credit card and, if you need to withdraw cash, use your debit card instead.

Other added fees

As well as purchase rates and cash advance fees, credit cards can also come with a whole host of other charges depending on how you use them.

Most cards will charge extra for making purchases in foreign currencies for example, and some will charge separate rates for balance transfers.

It is important to choose a credit card that suits your needs, as there a several different types of card available designed to suit different purposes.

If you travel often for example, you might want a card that offers 0% on purchases made overseas or one that offers reward points redeemable on international flights.

If you’re struggling to keep up with increasing debt on a particular card, then you can take out a balance transfer card that will allow you to delay paying interest on the first card for a period of time.