How Does Your Credit Card Interest Work

Are you a credit card user? You must have read or heard about the exorbitant rates of interest charged on the credit cards? But not many of us know how exactly the interest on your credit works.  

Is the entire amount of spend charged an interest? Or is it only the amount that remains unpaid? Can paying the Minimum Amount Due save me from the interest being charged? Is it charged on a monthly or yearly basis? 

These are some of the common questions that arise in the minds of many credit card users.  

In this article of ours, we aim to make clear to you the intricacies of credit card interest and its working.  

Credit Card Interest  

Credit cards are extremely convenient and beneficial in many terms. That is undeniable. But you can get into deep financial mess if you do not understand the working of credit card interest rate.  

All credit cards come with an interest rate. Just like you pay interest on any money borrowed from someone else, same is the case with a credit card. When you use your credit card to pay for various expenses of yours, it is the credit card issuer who will pay instead of you. However, allowing a Grace Period is one of the best features of a credit card. Depending upon when you make the expense during your billing cycle, you can get anywhere between 15-45 days of credit period.  

On the billing date of your credit card, a statement is generated encapsulating all the expense incurred by you during the particular period of billing.  

How Do You Get To Know The Interest Rate On Your Credit Card? 

Do you remember when you would have got your credit card, you must have received a small booklet which contained all the terms and conditions pertaining to your credit card statement? This booklet would have had the Annual Percentage Rate (APR) applicable on your credit card, cash withdrawal rates, etc.  

The same is also available on the website of your card issuer. You can get more details on your cards here as well. 

The interest rate mentioned there, which is also known as the APR, is the annual rate charged on your credit card debt.  

Let us try and understand on what balances and when the interest is charged with an extract of a typical credit card statement 

Date	Transaction	Amount
12 Jan 2019	Purchased furniture	Rs 12500
15 Jan 2019	Purchased Gadgets	Rs 55,000
18 Jan 2019	Purchased Upholstery	Rs 14,500
25 Jan 2019	Statement Date -Total Due	Rs 82,000

Minimum amount due = Rs 2550 and the due date on which the outstanding amount is payable is 10 Feb 2019. APR charged on the card is 37.2% 

Ideally, on or before the 10 Feb 2019, you are liable to pay the entire amount of Rs 82,000.  

Do not get misled by the Minimum Amount Due figure. You can pay the minimum amount due by the due date to only avoid paying the Late Payment Penalty. Let us assume that on 10 Feb 2019, you are able to make a payment of only Rs 50000 towards your outstanding bill.  

Any amount that remains outstanding as on the date of bill payment is charged interest.  

Now, we have an Annual Percentage Rate as given by the credit card issuer. From this rate, a Daily rate is deduced like below: 

The APR for the above example is 37.2 %, so the monthly APR will be .372/12 which is 3.1%. This can, in turn, be divided by 30 or 31, to arrive at daily interest rate which will be .00103. 

So, over your unpaid balance of Rs 32000 (Rs 82000-Rs 50000), every day that you delay the payment an interest of Rs 33.07 is chargeable.  This amount may look smaller, but let us see how it stacks up over the next month. 

Now, you have an outstanding amount and in addition, you use your card normally during the next month.  

Date	Transaction	Amount
27 Jan 2019	Paid at restaurant	Rs 2,500
05 Feb 2019	Purchased Clothes	Rs 5,000
12 Feb 2019	Paid telephone bill	Rs 4,500
25 Feb 2019	Statement Date -Total Due	Rs 12,000
	Outstanding Balance from last month	RS 32,000
25 Feb 2019	Total Interest on outstanding balance	Rs 990
	Interest on the amount utilized on 27 Jan for 29 days	Rs 75
	Interest on the amount utilized on 05 Feb for 20 days	Rs 103
	Interest on the amount utilized on 12 Feb for 13 days	Rs 60
25 Feb 2019	Grand Total Including Interest	Rs 45,228

As you can see from the example above, not only are you charged an interest for the outstanding month of Rs 32000 from the previous month, any further purchase of yours is also charged the same rate of interest.  

This proves very expensive. Only when you have cleared all previous balances, you can freely use your card for the next month. Or else all further purchases are charged at the given APR even before the billing date. In this case, you do not even have a grace period. Till the time you do not make the payment of the entire figure of Rs 45,228, you will continue to attract an interest.  

You have seen that you have accumulated interest charges to the tune of Rs 1,228 in just a month by not paying in full.  

Additional Reading: Learn how making automatic payments for your credit card is beneficial 

This is how you get into an unending spiral of revolving debt if you are not careful about how much you spend on your credit card. It is important that you pay adequate attention here so that you are able to clear off all that you spend.  

Revolving credit card debt is not only bad for your financial feature but also it costs you your credit score.