It is important to differentiate between simple and compound interest before we go into any financial commitment as a lack of understanding can incur significant costs💲.
Simple interest is the rate of interest you are charged every month, this moves in line with the Bank of England base rate(except you are on a fixed rate).🤑
Your compound interest rate takes into account the interest you pay on interest as well as the outstanding amount if you don’t pay your credit card balance💳 (or other financial products with compound interest) off every month. Even if you do pay your balance off every month, the compound rate shows how much interest you’d pay each year if you didn’t.
Compound rates will also go up or down when the Bank of England Base Rate changes but the changes will be bigger than the changes to the simple interest rates because they take into account the interest on interest. (check our previous posts to read more about compounding)
How to compare interest rates?⬇
Most credit card issuers just show compound interest rates. This means that you can use the standard and cash compound rates on your current credit card to compare against other credit cards.
Comparing Compound interest vs APR?⬆ ⠀
You can also use your compound standard rate to compare against the APR of another card, unless the other card has annual or monthly fees. ⠀⠀⠀⠀⠀⠀⠀⠀⠀
An APR is a rate that is used to give people a standard way of comparing the costs of different credit cards, before they apply. In advertising, lenders use a rate called the representative APR. This is the APR you are most likely to get if you are successful because some card issuers give different APRs to different customers. ⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
The APR is based on the interest rate charged on purchases and will usually be the same as the compound purchase rate. But this is not always the case because the APR also takes into account any monthly or annual fees you pay for having the card