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Understanding interest charges

Interest is charged on the balance owing on your credit card. When and how much interest you’ll be charged depends on how you operate your credit card account.

Interest charges

  • The highest interest balances on your statement always get paid off first.
  • Statemented transactions always get paid first.
  • Interest is calculated from the day of purchase when you don’t pay your current balance in full.

If you always pay your statement’s current balance in full by the payment due date, you’ll take advantage of any interest-free days which apply to your card, and avoid paying any interest on the purchases you make. 

If you don’t pay at least the minimum payment shown on your statement, you could be charged a late payment fee.

What gets paid off first

When you make a payment to the outstanding balance of your credit card account, there are certain things that get paid off before others. 

Any payment will firstly be applied to the highest interest rate balances on your current statement. This means your payment will be applied first to the balances which incur a higher interest rate (e.g. cash advances and purchases), before any balances with a lower interest rate such as a balance transfer. By paying off your highest interest balances first, you could pay less in interest on your outstanding balance.

In general, we’ll apply your payments to those amounts in the order of:

  1. fees (e.g. account fee), 
  2. interest charges (e.g. purchase interest or cash advance interest), 
  3. transactions (e.g. purchases, cash advances etc).

Here’s an example:

Sue has a Low Rate Mastercard with a 13.45% annual interest rate on purchases. She transfers a $5,000 credit card balance from another bank, for which she gets a 0% p.a. interest rate for the first 12 months. She then uses her card to buy $300 worth of groceries and withdraws $100 from an ATM.

1 March - Balance transfer of $5,000 from another bank at 0% p.a. interest for 12 months
3 March - Buys $300 worth of groceries
5 March - Withdraws $100 from an ATM 
30 March - Receives her online statement. Current balance of $5,400 is due on April 25
23 April - Pays $200 and plans to pay the rest over the next few months.

Any payments Sue makes will be applied to her statement in order of highest to lowest interest rate balances. In this case, payments will be applied to the $100 cash advance, and then to the $300 grocery purchase, and then finally to the $5,000 balance transfer. Sue’s payments will be applied in the following order:

Items
interest rate
balance
1. Cash advance 22.95%  p.a. $100
2. Purchases 13.45% p.a. $300
3. Balance transfer 0% p.a. $5,000

How interest is calculated

Interest is always charged from the date of each transaction (purchase) when you don’t pay your current balance in full each month. This will be applied to transactions making up the current balance, and any new transactions, until the closing date of your next statement, taking into account any payments made to your credit card account. Therefore, if you pay your current balance in full in one month, but don’t the next, you’ll be charged interest from the date of each transaction or fee on your current statement.

Here’s an example:

Sarah sometimes pays off her credit card balance in full, and sometimes just makes the minimum payment required – it depends on how her finances are looking that month.

She paid the balance shown on her 31 March credit card statement in full, so her opening balance on her next statement at 1 April is $0. On 9 April, she books a trip to Fiji for $700, and her closing balance at 30 April is $700. She plans to pay this balance in several payments over the next few months. Sarah will be charged interest from 9 April, the date she purchased her trip. 

Interest-free days

Most credit cards come with a number of interest-free days on purchases. These are usually about 30 days (the statement cycle period), plus a number of days until the payment due date.

Many credit cards have up to 44 or 55 interest-free days, (although some credit cards have no interest free days). The number of interest free days depends on when you make a purchase, however, if you don’t pay your balance in full, you will not receive interest free days on purchases.

  • You can take advantage of interest-free days by paying off your credit card statement’s current balance – in full – by the due date.
  • If you make your purchases earlier in your statement cycle, you’ll get more interest-free days.
  • Interest-free days only apply to purchases, not to cash advances or balance transfers.

When interest-free days don’t apply

Interest-free days don’t apply to cash advances, some bill payments and balance transfers.

  • Interest is charged on cash advances from the date of the cash advance at the applicable interest rate.
  • The rate for cash advances is usually higher than interest charged on purchases.
  • Interest-free days do not apply to credit cards with a balance transfer amount.  Therefore if you use a credit card to make a purchase, and it has a balance transfer amount, you’ll be charged interest on the purchase at the applicable interest rate, from the date of the purchase. You may also be charged the applicable interest rate on the original balance transfer amount (usually lower than the purchase interest rate or nil) from the day the balance is transferred to a BNZ credit card.