The credit card interest rate is charged on the outstanding balance that a cardholder carries after the payment due date. It is sometimes also known as finance charges as it can include late payment fees.
Interest rates on credit cards are applicable only when the user has –
- Not paid the total amount due to the due date.
- Paid only the minimum amount due.
- Paid only a partial amount of the bill.
Interest will not accrue if the cardholder has cleared the total payable amount before the end of the grace period.
How is the interest rate on credit cards calculated?
The interest rate on credit cards is displayed as a per month rate by financial institutions. They are also annualized sometimes, and hence, also known as the annual percentage rate or APR.
However, the rate is charged on a daily basis on the outstanding balance. The general formula to calculate interest on credit cards is –
Number of days the balance is overdue x outstanding amount x [(interest rate x 12) /365)]
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Example 1 –
An individual has an outstanding balance of Rs.3,000 on his credit card. Let’s assume that this amount is overdue between January 1 and January 21, which is 20 days. The rate of interest is 4% per month.
Now, by placing these values in the formula –
20 days x Rs.3,000 x [(0.04 x 12) /365)] = Rs.78.90.
Individuals should know about credit card bill payment to clear their dues in time and avoid interest accumulation.
Example 2 –
Now, let’s assume that a cardholder paid Rs.1,500 on January 30. However, he made a purchase of another Rs.2,000 with his credit card on February 7. Now, his total outstanding balance is Rs.3,500 as of February 21.
Here, the credit card interest rate will be applicable to the previous balance of Rs.1,500 for 22 days (January 30 to February 21).
So,
22 days x Rs.1,500 x [(0.04 x 12) / 365)] = Rs.43.40
The rate will be charged on the new purchase of Rs.3,000 for 14 days (February 7 to February 21)
Hence,
14 days x Rs.3,000 x [(0.04 x 12) / 365)] = Rs.55.23.
Therefore, the total interest accumulated at the end of the billing period will be Rs.98.63 (Rs.43.40 + Rs.55.23).
Cardholders should always try to pay the total amount due to avoid interest payment. Several convenient options to pay credit card bills exist that users can make use of.
Plus, even though carrying an outstanding balance may seem feasible at times, it can hurt their credit score as well.
Interest on ATM cash withdrawal
Withdrawing cash with a credit card will accrue interest instantly. There is no grace period in this case. Additionally, a cash advance fee will also be charged, which generally ranges between 2.5% to 3%.
Example –
A cardholder withdraws Rs.5,000 on January 15. The bill generation date is the 30th of every month. Hence, the interest will be applicable for 15 days. Let’s assume that the credit card interest rate is 4%.
Hence, the interest accrued will be –
15 days x Rs.5,000x [(0.04 x 12) / 365)] = Rs.98.63
If the cash advance fee is 3%, then the applicable charges will be –
Rs.5,000 x 3 x 100 = Rs.150
Therefore, the total charges accumulated on the withdrawn amount will be Rs.248.63 (Rs.98.63 + Rs.150).
It should be noted here that some credit cards offer an interest-free period on ATM cash withdrawals. The Bajaj Finserv RBL Bank SuperCard is one such product. It allows users a no-interest period of up to 50 days when withdrawing cash from ATMs.
To conclude, individuals should check the online credit card interest rate before applying. They must also take into account the other charges to keep the cost of its utilization low and maximise benefits.
