How does interest work?

When you sign up for a credit card, your credit card provider (for instance, ANZ or Bank of Melbourne) is agreeing to lend you money when you use the card, and you are agreeing to pay it back with a specified amount of interest.

Although interest is calculated on a daily rate (Daily Percentage Rate or DPR), the advertised interest rate you will usually see on a credit card is the APR (Annual Percentage Rate).

If this APR is 15%, to calculate your DPR you divide the APR by the number of days in the year, so:

15/365 = 0.041%

Your DPR is 0.041%, so you will be charged 0.041% interest on the balance in your credit card account for each day the interest is to be applied.

So, if you have a purchase of $1000 with 30 days of interest being charged on it, the interest you will pay will be around $12.

Therefore, the total amount you should have to pay back at this time would be $1012.

Interest is payable each month that you owe money, which is why it’s a good idea to look for cards with interest free days (usually 45 or 55 days) and pay your card off in full each month.