Credit card interest is calculated daily and charged monthly. So when your balance changes due to purchases or payments, the amount of interest you pay will also change.
Let’s say we have a credit card with a $4000 balance and an interest rate of 18% p.a. at the start of a 30-day statement period. If we made a payment of $2000 halfway through the cycle, we would pay a total of $44.10 in interest, made up of 15 days of interest on the $4000 (totalling $29.40) and 15 days interest on the $2000 balance (totalling $14.70).
If you make different types of transactions using your credit card, any payments will automatically go towards the part of the balance that attracts the highest rate of interest.
Case Study: Yoshi’s Cash Advance Costs
Yoshi has a credit card with a purchase rate of 18% p.a. and a cash advance rate of 21.99% p.a. His current statement shows that he has made $1000 in purchases and $1000 in cash advances.
If Yoshi makes a payment of $500, he will be charged the following rates of interest on the remaining debt:
Yoshi will continue to be charged interest on the full purchase amount until the entire $1000 cash advance is paid off.