Credit Card Interest Rates and How To Calculate It
A lot of credit card users do not understand about the interest rates. While it may seem to be a complicated thing to deal, it is not as difficult thing to understand as you would think it is. Read on to understand everything you want to know about credit card interest rates.
Credit card interest rate, which is also known as the finance charge is the rate charged by the credit card companies on the amount you borrow. The interest rate varies from lender to lender and based on the type of credit card you own. Let us understand more about the credit card interest.
How Is Credit Card Interest Rate Calculated?
The credit card interest rate in India is calculated as per the APR – Annual Percentage Rate. It is the interest rate calculated for the whole year rather than the monthly rate. However, while determining the interest for the monthly transactions, the monthly percentage rate or the MPR will be applied. Both the APR and the MPR significantly vary from bank to bank and the type of credit card you use. It is therefore paramount that while you apply for a credit card, you ask the credit card issuer about how much APR will be applicable on the card.
What Type Of Transactions Attract Interest Charges?
Here are a few cases when the credit card companies charge interest on the credit card transactions:
When you fail to pay the outstanding dues within the due date
When you pay only the minimum amount due for the month
When the amount you repay is less than the minimum amount due
- When you use your credit card for cash advance. This essentially means that you use the credit card to withdraw money from the ATM
When you carry forward the due amount from the previous month to the next month If you pay the outstanding amount on your credit before the due date, the banks will not apply any interest charge.
Factors That Affect The Credit Card Interest Rate
Your personal credit score is one of the most dominating factors that the credit card companies consider while deciding the credit card interest rate. However, there are other factors which affect the interest, which are listed below:
Your past repayment history speaks volumes about your ability to repay the dues and your creditworthiness. If the lender sees that you have been disciplined with your repayments and have minimum or no outstanding dues, it will not only increase your credit score, but also help you get credit card at lower interest rate. On the other hand, if you have defaulted on your payments, the credit score will be lower and consequently the interest payable on the credit card will be higher.
The amount you owe
This implies the credit you owe. The credit companies while deciding the credit card interest checks the credit limit sanctioned to you and how much credit you have used. A lower credit ratio will give an impression that you have been responsible with the payments. But, if the credit ratio is higher, be prepared to attract higher interest charge on your credit card.
Apart from the above factors, the length of the credit history, and the type of credits you owe also affect the interest rate.
When is Interest charged on Credit Cards?
Interest on Credit Cards is typically charged under several circumstances, influencing the overall amount owed:
Delayed Payments: If you fail to pay the outstanding balance by the due date indicated on your Credit Card statement, the credit card company will apply interest on the unpaid amount.
Minimum Payment only: Making only the minimum payment instead of paying the full outstanding balance, results in the remaining amount accruing interest.
Partial Payment: When you pay an amount less than the total outstanding due, the remaining balance becomes subject to interest charges.
Cash Advances: Using your Credit Card to withdraw cash from an ATM incurs immediate interest charges, often at higher rates than regular transactions.
Carrying Forward Balances: If you carry over an unpaid balance from the previous billing cycle, interest will apply to this carried-over amount.
It's crucial to note that settling the complete outstanding balance on your Credit Card before the due date, avoids interest charges for that billing cycle. Understanding these scenarios can help users manage their Credit Card payments more effectively and minimise interest expenses.
What is a Credit Card Interest-free period?
A Credit Card interest-free period refers to a window of time during which you can make purchases using your Credit Card without incurring any interest charges. It typically starts from the date of your purchase and extends until the payment due date for that billing cycle.
During this interest-free period, if you pay off the entire outstanding balance by the due date, you won't be charged any interest on those purchases. Essentially, it's a grace period provided by the credit card issuer where you can use the card for purchases without immediately incurring interest, as long as you clear the full amount owed by the due date.
However, if you carry forward any portion of the balance beyond the interest-free period, the credit card company will start applying interest charges on the remaining amount from the purchase date until it's fully paid off.
It's important to note that not all transactions, like cash advances, may have an interest-free period. Also, the length of the interest-free period can vary among credit card issuers and may depend on factors like your credit history, the type of card and the issuer's terms and conditions.
How To Use Credit Card Interest Calculator?
As discussed above, there are many factors that affect the credit card interest and it can be difficult to calculate the interest manually. To ease the calculation process for the customers, most of the banks provide credit card interest rate calculator on their website; you enter the information in the boxes and the tool will automatically show the interest applicable and the total amount due.
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