Credit card charges: How are they calculated

Credit card charges can catch you out and add to the cost of using your credit card. Here we look at how credit card charges are calculated and what you can do to avoid them.

Whether it is just the day-to-day interest charges that are added to your debt, or a one-off fee for using your card abroad, there are a whole range of credit card charges you need to understand if you are going to try and avoid them.

Different credit card charges

Credit card interest

This is the most basic credit card charge. It is the interest you pay on the money you are borrowing from the credit card provider. 

Most credit cards offer an interest-free period between when you buy something and the date you need to pay your credit card bill. If you pay your card off in full each month you should avoid paying interest.

If you don’t pay your card off in full you will be charged interest on the balance that remains on your credit card.

The interest charged on a credit card is expressed as an Annual Percentage Rate – or APR. The APR on credit cards ranges enormously from as little as 4.9%APR up to 49.9%APR. 

Credit cards often have several different interest rates for different types of transactions:

  • Purchase rate: This is the interest rate charged on things you buy with your credit card. 

  • Cash advance rate: This is the interest you’ll be charged if you take money out at an ATM using your credit card. It is usually higher than the purchase rate. This rate is charged on ATM withdrawals and several other transactions that your credit card provider classes as cash advances. Find out more with our guide to withdrawing money with your credit card.

  • Balance transfer rate: This is the interest rate applied to balances you move onto the card from another credit card. You can get a balance transfer card with a low rate specifically for this purpose.

  • Promotional interest rate: New cardholders sometimes get offered a promotional 0% interest rate on purchases or balance transfers for a set period of time.

Late payment fees

If you don’t make at least the minimum payment on your credit card by the due date shown on your bill, you’ll be charged a late payment fee of up to £12. Late or missed payments can also affect your credit rating and lead to you losing any promotional interest rate on your card.

Charges for exceeding your credit limit

If you build up a credit card balance that is more than your credit limit – for example, you spend £1,100 on a card with a £1,000 limit – you can be charged an exceeding limit fee. This can be up to £12.

Foreign usage fees

Take your credit card on holiday and you could find you pay extra to use it abroad. This can be made up of:

  • Loading fee: This is typically around 2.99% and charged every time you use your card.

  • ATM withdrawal fee: If you withdraw cash with your credit card, you’ll usually be charged around a 3% fee.

Not all credit cards have foreign usage fees. Some credit cards are designed to be used abroad and have competitive exchange rates and no fees.

Cash withdrawal charges

Withdrawing money on your credit card is an expensive way to get hold of cash. You’ll usually be charged a set fee of around 3% every time you use your card at an ATM. On top of that you’ll be charged interest on the amount you withdraw from the moment it leaves the cash machine. Plus, that interest rate may be higher than the standard APR.

Find alternatives to withdrawing money from an ATM in our guide to withdrawing money with your credit card. 

Balance transfer fees

If you transfer a credit card balance from an old card to your new one you may pay a balance transfer fee. This is a percentage of the amount you are transferring. For example, if you move £2,500 onto a credit card with a 2.9% balance transfer fee, an additional £72.50 will be added to your debt.

Annual fees

Some credit cards charge a fixed monthly or annual fee simply for having the card. This is typically reward cards that will give you a higher cashback or points rate in return for the monthly fee.

For example, the American Express Platinum Everyday card is free and pays you cashback of up to 1%. However, if you pay a £25 annual fee the American Express Platinum Cashback card pays you up to 1.25%.

You need to weigh up the value of additional benefits you get from the credit card against the cost of the annual fee.

Other credit card fees

The credit card charges listed above are the most common ones that you are likely to encounter, but there are a few others you need to know about:

Additional cardholder fee

You may be charged this if you want to add someone else to your account.

Card replacement fee

If you lose your credit card it is unlikely you’ll be charged a card replacement fee. The exceptions are that you need it quickly or it needs to be sent overseas.

Dormancy fee

A small number of credit card providers charge a fee if you don’t use your card for a long time. The fee is usually £2 - £20.

Paper statement fee

In these days of e-billing, some credit card firms charge a fee if you request a paper copy of your credit card statement.

Returned payment fee

If your credit card provider tries to take a repayment from you via a direct debit or cheque but there isn’t enough money in your bank account, the payment will bounce, and you’ll be charged this fee of up to £12.

Trace fee

If your credit card company loses track of you – for example, you move to a new house and don’t inform them of your change of address – they may charge you a fee for finding you again. This is typically £25.

How is credit card interest calculated?

Interest is charged daily on credit cards, but you usually have up to 28 days interest-free after a purchase. This is because most credit cards don’t charge interest on purchases until the payment date on your statement has passed. 

After that point interest is charged at your purchase rate. Your credit card interest is calculated in one of two ways. Either:

  • Average daily balance: The balance on your credit card is constantly changing depending on your spending. This method takes an average figure and multiplies it by your APR in order to calculate how much interest should be added to your account. 

To work this out, your credit card company takes the balance on your credit card at the end of every day in a month and adds all those balances together. They then divide that by the number of days in the month. This gives them an average daily balance. This average daily balance is then multiplied by your APR. The result informs your credit card company of how much interest to charge.

  • Daily balance: Interest is calculated and added at the end of each day.

Both methods usually result in the same amount of interest being added to your bill.

Which interest rate is paid off first?

If you have several different interest rates charged against your credit card debt, then anything you repay will be taken off the balance attracting the highest interest rate.

For example, you have a credit card with a 0% promotional rate on balance transfers and a 23.9% purchase rate. You’ve transferred a £1,000 balance onto the card and spent £500 on new purchases. You then make a repayment of £250.

You have a total credit card balance of £1,500. £1,000 of that is interest-free and £500 is attracting 23.9% interest. Your £250 payment will reduce the £500 balance leaving £250 still accruing interest.

Can my credit card interest rate increase?

Your credit card company can increase the interest rate on your credit card. If they decide to do this, they have to give you at least 30 days’ notice.

You should be given 60 days to reject the rate rise. If you do reject it, you’ll need to cancel the card and repay the debt within the 60 days. During that time the interest rate will remain at the old level.

How to avoid credit card charges

The simplest way to avoid credit card charges is to use your credit card sensibly and pay your bill off, in full and on time each month via a direct debit. 

Here’s how to avoid credit card charges:

Pay your balance off in full each month 

If you clear your balance by the date shown on your credit card statement you shouldn’t pay any interest and you’ll avoid late fees.

Set up balance alerts 

Most cards have an option to send you regular text messages or emails telling you your balance. Some will also send you an alert if you are getting close to your credit limit. Use these to avoid paying a fee for exceeding your credit limit.

Log in to your account

Checking your account regularly means you can check you aren’t close to your credit limit and that you’ve paid your bill. This means you can avoid late payment fees or charges for going over your credit limit.

Check your card before you travel

Make sure you know what fees you will pay if you use your credit card abroad. If your card is expensive to use when you are on holiday, consider getting a specialist travel credit card to avoid foreign usage fees.

Never withdraw cash

If you avoid withdrawing money with your credit card you won’t pay card withdrawal fees or interest on your cash.

Shop around for a balance transfer deal

Lots of credit cards will offer you an interest-free period on balance transfers. But many come with a balance transfer fee. Usually, the longer the interest-free period the higher the fee. Take a look down the best buy tables for credit cards with a shorter interest-free period as some of these don’t charge any balance transfer fee.

For example, TSB offers a balance transfer card with a 30-month 0% period and a 2.95% balance transfer fee. Whereas NatWest’s balance transfer card offers a 20-month interest-free period and no balance transfer fee.

Disputing credit card charges

If you think a credit card charge is unfair you can dispute it. You’ll need to give good reasons for why you think you shouldn’t have to pay the fee. Sometimes card providers will waive a fee if you’ve never had a fee imposed before and it is clear it resulted from a genuine mistake.

Get in touch with your provider as soon as possible if you spot a fee on your credit card statement that you think is a mistake, or you don’t believe you should have to pay.