How does interest working on credit cards

Martin92

Hi everyone, 
Sorry if this sounds silly as i'm trying to understand properly, this has nothing to do wit balance transfers, i just would like to know how credit card interest works.

If I have 2 credit cards for example with £5k on one & £6k on another...would it be better to pay off them each month £500 as an example or hammer one down first such as the £6k because of the interest would be higher? Does that make sense...i'm trying to understand if i should pay off both cards the same ish amount each month or concentrate on one card first and get that cleared.

Thank you for all your help in advance. 

[Deleted User]

You pay the one with the highest interest rate.

The balance is not a consideration.

jonesMUFCforever

It depends on which card charges the highest APR. Then pay that one off as fast as you can whilst maintaining at least the minimum on the other card.
Obviously the best route for you would be to try and get a new balance transfer card if eligible for some of your debt.

kimwp

Hi Martin92,
Interest rates can seem very complicated, but the key thing to remember when making this decision is that the interest rate applies to the amount you are reducing the debt by, rather than the amount of debt.

So (bearing in mind that you must pay the minimums on both accounts first), you then pay what you can on the card with the highest APR because that where the payment will have the biggest impact.

As a simplified example, account A charges 4% interest and card B charges 7% interest. If I pay £100 to card A, then I stop having to pay 4% x £100 = £4 in interest. If I pay £100 to card B, then I stop having to pay 7% x £100 =£7 in interest.

To show that the overall balance doesn't change this: If card A has £10,000 on it (£400 interest) and card B only has £2,000 on it (£140 interest), the total interest you would pay is £400 + £140 =£540 (ignoring the effect of the minimum amounts on reducing the interest paid) if you didn't pay in the £100. If you pay £100 to card A, your interest is £540 - £4 = £536. If you pay £100 to card B, your interest is £540 - £7 = £533, so you are better to pay card B even though the balance on card A is higher. 

There are psychological benefits to paying the smaller debt because the smaller debt will be cleared quicker, but this is not the least expensive option. Hope that helps.