How interest on credit card is calculated.

The dictum on Credit Cards says that when we receive the credit card bill/statement, we should pay the complete bill amount by the end of credit free period to avoid paying interest charges on the outstanding amount. Let us go through further details about this.

  1. To pay the credit card bill, we generally get a credit-free period of 20 days from the bill/statement issue date.
  2. By paying only the monthly ‘minimum due amount’, which is generally about 5 percent of the total amount of the bill, to the lender/issuer, we can repay the outstanding amount over a period of time. This process is commonly known as revolving credit facility.
  3. But this deferred payment facility comes at a cost, as interest is levied (at a certain percentage) on the entire outstanding amount until the card holder makes the complete payment of the credit card bill.

Further, it is also revealed that:

  • Credit cards offer a pre-approved credit facility.
  • It is a revolving credit, wherein there is a grace period or free credit period on the utilised amount (the credit purchase made through credit card) for 20-50 days, based upon the type of the credit card.
  • After this, if the outstanding amount is not paid in full or is completed by paying the ‘Minimum Due Amount’ then interest at the rate of 3-4 percent per month is levied on the entire outstanding amount along with the interest levied on it on any later date.
  • The General Formula to Calculate Interest on Credit Card is like this.
  • (Number of days are counted from the date of transaction made x Entire outstanding amount x Interest rate x 12)/365.

This is explained through the following four scenarios with the assumptions as under for the illustrations.

S.NoDetailsRemarks
1.Transaction DateJuly 1, 2019
2.Transaction AmoutnRs. 10,000
3.Statement DateJuly 6, 2019
4.Minimum amount Due (Normally 5% of retail purchases + Other fee charges)Rs. 500 (5% of Rs. 10,000)
5.Total amount DueRs. 10,000
6.Amount Due DateJuly 26, 2019
7.Assumed monthly interest rate on unpaid credit card bill3.5% p.a

Scenario 1: Pay full bill amount before the due date

  • Bill amount fully paid on: July 21
  • Total payment made: Rs 10,000

Calculation:

  • Interest levied for 21 days (Between July 1 and July 21): 241.56 [21*10000*3.5%*12/365 = 241.56]
  • Total interest charged = 0
  • Here, interest will not be levied since payment has happened before due date and system will net off the interest charged, and you will not be pay additional interest charges for it.

 

Scenario 2: Partial payment before the due date

  • Total payment made: Rs 5,000
  • Payment date: July 21
  • Next statement date: August 6
  • Transaction done between July 6 to August 6: NIL

Calculation:

  • Interest levied for 21 days (Between July 1 and July 21): 241.56 [21*10000*3.5%*12/365 = 241.56]
  • Interest levied for 15 days (Between July 22 and August 6, on balance of 5000 [10000 (Bill amount) – 5000 (payment made)]): Rs. 86.4 [15*5000*3.5%*12/365 = 86.4]
  • Total interest charged = 86.4 + 241.56 = Rs. 328

Remarks:

Interest will be levied for the complete amount of Rs 10,000 till the first payment. Interest on balance amount (Rs 5,000) will be levied for the next 15 days till new statement is generated.

 

Scenario 3: Partial payment after the due date

  • Total payment made: Rs 5,000
  • Payment date: July 28
  • Next statement date: August 6
  • Transaction done between July 6 to August 6: NIL

Calculation:

  • Interest levied for 28 days (Between July 1 and July 28) = Rs. 322.2 [28*10000*3.5%*12/365 = 322.2]
  • Interest levied for 9 days (Between July 28 and August 6 on balance of 5000 [10000 (bill amount) – 5000 (payment made)]) =Rs. 51.8 [9*5000*3.5%*12/365 = 51.8]
  • Total interest charged = 51.8+322.2 = Rs. 374

Remarks:

Interest will be levied for the complete amount of Rs 10,000 till the first payment. Interest on balance amount (Rs 5000) will be levied for the next 9 days till new statement is generated. In addition to above, “A late payment charges will also be applied as ‘Minimum Due Amount’ was not paid on or before the ‘Due Amount Due Date’,” said Yadav.

 

Scenario 4: Partial payment after the due date and subsequent transactions made

  • Total payment made: Rs 5,000
  • Payment date: July 28
  • Next statement date: 6 August
  • Transaction done between 6 July to 6 August: 1
  • New transaction amount: Rs 1000
  • New transaction date: July 15

Calculation:

  • Interest levied for 15 days (Between July 1 and July 15) = 172.6 [15*10000*3.5%*12/365 = 172.6]
  • Interest levied for 13 days (Between July 16 and July 28 on balance of 11000 [10000 (outstanding (bill amount) from previous statement) + 1000 [new transaction]) = 164.5 [13*11000*3.5%*12/365 =164.5]
  • Interest levied for 9 days (Between July 28 and August 6 on balance of 6000 [11000 (outstanding) – 5000 (payment made)]) = 62.13 [9*6000*3.5%*12/365 = 62.13]

Remarks:

Interest will be levied for the complete amount of Rs 10,000 till the date of the first transaction. Then the interest will be charged on total outstanding (value of subsequent transaction + ‘Total Amount Due’ of the last statement) till the date of first payment. Interest on balance amount (Rs 6,000) will be levied for the balance number of days till the generation of next statement. Additionally, applicable late payment charges will also be applied.

 

Points to remember:

  • If you pay back the Total Amount Due’ by the due date, then interest which is leviable till the due date will get reversed and no interest will be levied.
  • If you do not pay back the ‘Total Amount Due’ by the due date and only pay a partial amount, you will be liable to pay the total interest chargeable till the due date.
  • It is also suggested that one should avoid fresh card transactions if he/she has not paid credit card dues.
  • Since the interest-free period stands withdrawn on the non-payment of the entire credit card dues, even fresh card transactions start attracting interest charges till you make the payment of the entire credit card dues.
  • If payment by the due date is not made, interest will be calculated on a daily basis and GST at 18 percent is additionally charged on the interest amount as per the Government norms.
  • Ensure to avoid using your credit card for ATM withdrawals as far as possible as lenders charge a cash advance fee of up to 3.5 percent on the amount withdrawn.
  • Additionally, credit card ATM withdrawals also attract interest charges right from the day of the transaction till the date of its repayment.
  • You do not get any credit-free period to make interest free re-payments of the same.
  • Non-payment of the ‘Minimum Payment Due’ by due date (as mentioned in the statement), also attracts an additional late payment charges as a penalty.
  • Non-payment of the minimum amount due on time would additionally cost a late- payment fee of up to Rs 1,000 or it can be a percentage of ‘Total Amount Due’, as per the credit card norms.”

 

 What to do if you are unable to make payments before due date?

  • If you have failed to repay your credit card bill by the due date, it is best to avoid further use of your credit card if you do not want to increase your interest payments since you have run out of interest-free days (credit-free period).
  • Hence, if you find repayment difficult, you can convert big-ticket transactions into EMIs (equated monthly instalments) for ease of repayment.
  • Experts suggest if you are not able to repay the entire outstanding at one go, or not even able to convert transactions into EMIs, then you can also take a personal loan from any lender and pay the entire credit card outstanding amount in one go.
  • The interest rate on a personal loan, which ranges from 1.2 to 2.5 percent per month, is slightly less than the interest rate levied on a credit card which ranges from 3 to 4 percent per month. This way financial indebtedness can be reduced to a certain extent.

Disclaimer:

The actual interest calculation will vary based on your purchase, revolve behaviour and the interest rate applicable on your credit card. Also, making only the minimum due/partial payment every month would only increase your repayment time period over years with consequent interest payment getting added on the outstanding balance.

Author: Admin Bankedge

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