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:
- Payment history
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.
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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