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All about credit card interest rates – What is it and how to calculate?

3 min read

Stack of black color credit cards with copyspace

Credit cards are among the handiest financing tools that have gained favour among individuals for their attractive and evolving benefits with every transaction.

Nevertheless, individuals may step back when opting for a credit card considering the common notion regarding credit card interest rates. However, not many are aware that interest accrual on credit cards is entirely avoidable. 

Such interest charge is applicable only under the following circumstances – 

  • When one misses on timely credit card bill payment 
  • When an individual pays the minimum amount due, interest is charged on the balance amount
  • When one makes a payment less than the total due amount mentioned on the credit card
  • When one withdraws cash from ATM with the credit card

Hence, one should make sure to pay off the unpaid amount of his/her credit card bill within the due date to avoid credit card interest rates applicability. Financial Institutions and credit card companies usually provide up to 20 days between the statement generation date and the bill due date, known as the grace period. If users pay off the due amount within the grace period, it does not attract any interest.

How is interest on a credit card calculated?

In the case of a credit card, interest is calculated on the outstanding amount for a particular billing cycle. Lenders levy such interest as per a predetermined credit card interest rate, which is usually high. The formula used to calculate the interest is as follows –

(No. of days between transaction date and the day payment is made) x (Total outstanding amount) x (Interest rate charged by the credit card company x 12)/ 365 days

Now, let’s consider a situation where only a partial payment has been made within the due date. For this situation, the following values will be considered – 

  • The total outstanding amount – Rs.10,000
  • Partial payment on September 20 – Rs.5,000
  • Transaction date – September 1
  • Statement issue date – September 5
  • Due date – September 26
  • Minimum amount due – Rs.500 
  • Credit card interest rate applicable – 3.5 percent

Interest for 21 days between September 5 to September 26 – 

21 x 10,000 x 3.5/100 x 12/365 = 241.56

Now a partial payment of Rs.5,000 has been made before the due date on September 21. Therefore, interest for 15 days from September 21 to October 6 is equal to – 

15 x 5000 x 3.5/100 x 12/365 = 86.4

The total interest charged thus equals – 

241.56 + 86.4 = 328

The interest amount will be calculated on the overall due amount from purchase until the first payment date. However, after the first payment is made, interest will be calculated on the remaining amount and will be charged for the subsequent 15 days until the next statement generation date. Apart from the formula, there are other things about credit card interest rate calculation that you must know about.

For instance, in case the partial payment or when the minimum amount due is not paid, then besides high credit card interest rates, users will also have to pay an additional amount as a late payment fee. 

Moreover, one should also keep in mind that if the bill is not paid by the due date, then interest will be charged on the outstanding amount for each day until the full payment is made. Apart from that, according to norms set by the Government of India, financial institutions and credit card companies will also charge an 18% Goods and Services Tax on the interest amount.

To avoid the repayment strain, individuals can look for some of the best credit cards that come with low interest rates and nominal associated fees. They can also consider credit cards like Bajaj Finserv RBL Bank SuperCard that provide attractive features like conversion of card purchases into affordable EMIs. 

Moreover, the issuer of the said card also provides pre-approved offers that help in speeding up the credit card application procedure. Such offers can also be availed on several other unsecured financial products, like business loans, personal loans etc. Individuals can check their pre-approved offer by entering only nominal information like their name and contact information.

Credit card users should also learn how to read their credit card statement, which contains detailed information on all financial transactions carried out during the billing cycle. It will enable them to keep track of their expenses as well as promptly report any or fraudulent activities.

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