Many people use credit cards for various purchases and payments, often without having to pay immediately. Credit cards are widely used for their convenience in allowing spending now and paying later.
They typically come with an interest-free period of 20 to 50 days, during which cardholders must pay their dues. If payments are missed, the outstanding amount, known as the finance charge, must be paid along with interest.
What is Credit Card Interest? Credit card interest, or finance charges, is the fee banks and financial institutions charge when you don’t pay your credit card balance in full each month.
Factors Affecting Credit Card Interest in India: Before calculating credit card interest, consider these factors:
- Average Daily Balance
- Interest Rate (APR)
- Billing Cycle
- Payment Due Date
- Joining/Annual Fees
- Late Payment Fees
The interest rate on credit cards varies between banks and is charged only if the entire credit card bill is not paid by the due date.
All credit card users must understand the charges that apply in case of missed payments. This knowledge empowers you to make informed decisions and control your finances.
Credit card interest rates are generally fixed and not based on a customer’s credit score or previous debt payments. The monthly interest rates charged by leading banks on credit card dues range from 2.40% to 3.80%.
Calculating Credit Card Interest: To calculate credit card interest, follow these steps:
- Determine your average daily balance.
- Convert your APR to a daily interest rate (divide APR by 365).
- Multiply the average daily balance by the daily interest rate.
- Multiply the result by the number of days in the billing cycle.
Formula:
- Daily Interest Rate = APR / 365
- Daily Interest Charge = Average Daily Balance x Daily Interest Rate
- Total Interest Charge = Daily Interest Charge x Number of Days in Billing Cycle
Here’s an example to help understand how interest is charged on a credit card: Suppose you spent Rs. 20,000 on a credit card on September 1, and the bill was generated on September 6 with a due date of September 26.
If you make a partial payment of Rs. 10,000 on September 21, you’ll incur interest on the entire Rs. Twenty thousand from September 1 to September 21 (21 days), and the remaining Rs. 10,000 from September 21 to October 6 (15 days), as the bill generated date is considered for one month.
The interest for 21 days [{(21 x Rs.20000 x 3% x 12)} / 365 days = Rs.414.24] on the total amount of Rs. 20,000 would be Rs. 414.24, and the interest for 15 days [{(15 x Rs.10000 x 3% x 12)} / 365 days = Rs.147.94] on the balance of Rs. 10,000 would be Rs. 147.94, totaling Rs. 562.18.
Paying credit card dues from the previous month on time is crucial to maintain the interest-free period for credit card bills used in the following month. This is not just a recommendation but a necessity to avoid unnecessary interest charges.
Tips to Minimize Credit Card Interest in India
- Pay your balance in full each month.
- Choose credit cards with low APRs.
- Consider balance transfer options.
- Monitor your credit score.
- Avoid cash withdrawals.