Credit cards can be confusing, so if you know how your card works it can help you manage it more effectively. One of the most confusing aspects about credit cards is the way interest is calculated. Different types of transactions are treated differently when it comes to calculating interest and the fees you pay. Check your monthly statement for a section that identifies the Rates of Interest that apply to each type of transaction.

Here are five types of credit card interest charges and how to avoid being stung by them.

1. Purchase interest

The most common type of transaction is where you buy something online or at a physical shop. There are a few minor exceptions which are treated as cash advances (see below), but in general these are treated as purchases and attract purchase interest.

This is the easiest type of interest to avoid. Most cards have an interest free period.  It is important to understand how long this is and the precise rules.

Sherpa Says: You will not pay interest on your purchases if you pay the closing balance on your credit card in full every month by the due date.

2. Cash Advance interest

If you use your credit card to withdraw cash from an ATM, a branch or internet banking, it is treated as a cash advance and this incurs a higher rate of interest.
Some purchases, like traveller’s cheques or foreign currency are treated as a cash advance.

Some bills paid over the counter at a post office and some BPAY payments to merchants who don’t accept credit cards may also be treated as cash advances. If in doubt ask. American Express credit cards generally do not provide for cash advances other than for foreign exchange or travellers cheques.

A ‘cash advance’ can be useful for emergency access to cash, but it can also be expensive. There is generally no interest free period for cash advances, the interest rate that applies can be higher and there is usually a fee for the advance itself - up to 2%.

3. Balance transfer interest

Balance transfer offers can be a great way to quickly repay your credit card debt, but there are some points to consider before you jump in.

First, there’s a lot of variation in the interest rates on balance transfers. Having said that, you can usually find a zero % offer so keep your eyes peeled for those. These interest rates are usually for a fixed period.

Sherpa Says Caution: If you don’t pay off the entire balance transfer before the introductory period ends, you will pay a higher interest rate on what’s left until you do pay it off.

This is usually at the purchase or cash advance rate depending on the card issuer. If you use the balance transfer facility, it is treated the same as not paying your balance in full by the due date.  This means any new purchases don’t get an interest free period and you will pay interest from the date of your purchase.

If you want to use the balance transfer facility don’t use the card for anything else until you have paid off the transfer in full.

Use a separate card for your day to day purchases and pay this one off in full every month. It’s worth checking the fine print– whether the rate that applies to your balance transfer the purchase rate or the (usually higher) cash advance rate could make a big difference to how much interest you pay.

4. Interest on fees

Most card issuers now treat fees (like annual card fees) as purchases. This means that you will generally benefit from the interest free period for these as well - if you pay your bill in full by the due date. But after that date, the Purchase rate applies.

5. Special offer interest rates

These can be the most confusing and lead to a large number of complaints and queries. Card issuers regularly offer introductory rates or a lower interest rate for a certain period (often 3 or 6 months). These types of offers are especially popular with issuers of Store Cards.

When the offer period expires, the rate reverts to a much higher standard interest rate.

Sherpa Says: Take note of the expiry date, the duration and details of the offer and the rate that will apply when the offer period is over.

Remember it usually applies to the period for which the interest is calculated not the period you made the purchase. As always it pays to read the fine print.

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Vince Scully | LifeSherpa

With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Vince founded the Calliva Group; a fund manager, product issuer, advisor and lender to Government and private clients. Vince is an advisor to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie bank’s infrastructure team.

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