Credit cards are our true companions during financial emergencies. With a credit card, we can make an urgent purchase. We can also spend the credit call limit for paying insurance installments before the due date. There are several use cases of credit cards in our daily life. Are you planning to apply for your first-ever credit card in India? Well, one should know some things associated with credit cards before applying for one. Many people are confused with credit card interest rates in India. Read on to know the working of interest rates for credit cards.
Understanding the interest rates for credit cards
Credit/debit card interest charge is the price you pay for borrowing money from a lender. When you use a credit card, you have to return the money used to the issuer. Along with the used credit card limit, you also have to pay interest charges to the issuer. With the help of interest charges, a credit card issuer earns profit for lending money. Interest rates are dynamic and may change from one issuer to another. Interest rates can vary for different credit cards by the same issuer.
For some loans, the interest charges are linked to the debtor’s credit score and repayment capacity. For credit cards, interest charges are pre-decided and remain the same for debtors. However, many banks consider the debtor’s credit score before offering a credit card. One should know about the applicable interest charges before applying for a credit card in India. In the money-lending sector, interest charges are also called finance charges.
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Understanding the interest-free period
One may think that interest charges for credit cards are pre-decided and unavoidable. Well, every bank offers a due date for paying the credit card bill. If you fail to pay the credit card bill before the deadline, interest charges are applied automatically. Most banks apply a daily interest charge when a debtor fails to pay the credit card bill. Some banks may apply weekly, hourly, or monthly interest charges. The interest keeps accumulating to the day you pay the credit card bill after the deadline.
If you pay the credit card bill before the due date, you can escape interest charges. You don’t have to give a single rupee of interest when you pay the bill before the due date. The period before the due date is called the interest-free period. You only have to pay the credit limit used on your card during the interest-free period. The interest-free period may vary from one bank to another. Usually, banks offer a 50-day interest-free period to credit card users.
Understanding the calculation of interest charge
Are you checking your credit card balance and finding it increased daily? Well, it is because you may have carried forward pending payments on your credit card. To know the total amount of interest charge, you need to know APR (Annual Percentage Rate). The rate is pre-decided by the credit card issuer and is applied to your balance. If you want to know the daily rate of interest, you can divide APR by 365.
Calculation of total interest charge
For calculating the total interest charges, you need to know the average daily balance. Steps to calculate the average daily balance are as follows:
- Start with unpaid charges from the previous billing cycle on the first day of a new billing cycle.
- You have to note down the daily balance of your credit card at the end of each day. You have to repeat this process daily throughout the billing cycle. If the billing cycle is of 30 days, you need to know the daily balance at the end of all thirty days.
- Once all the daily balances are available, you need to add them.
- Divide the sum of the daily balance by the number of days in the billing cycle. The obtained result is called average daily balance.
Once you have the average daily balance and daily interest rate, you can calculate the total interest charges. Multiply the average daily balance with the daily interest rate and note the result. The obtained result is then multiplied by the number of days in the billing cycle to find the total interest charges.
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How to lower the interest charge on my credit card?
Some steps to reduce the interest charge on your credit card are as follows:
- Pay the entire credit card bill before the deadline to lower interest charges. Make sure you do not carry forward credit card payments to the next billing cycle.
- If you cannot pay the entire credit card bill, at least pay more than the minimum due.
- Decrease your daily credit card balance by making payments at regular intervals.
Before applying for a credit card in India, one should choose an issuer that has reasonable interest rates. Learn more about interest charges on your credit card!
