It is extremely important to know learn about a credit card before applying for one. The fees, charges, rewards, perks and privileges are all important features of a credit card. The most important feature is perhaps, you guessed it, the interest rate charged on the credit card. The interest rate on your card can mean the difference between a healthy credit user and a debtor. Here is a primer on how the interest on your credit card is calculated.

How to Calculate Credit Card Interest

While many credit cardholders focus on the annual fees, late fees, joining fee etc., it is the finance charge – or interest charges that you should focus on.

The interest rate is applied only to your outstanding balance on your credit card. If you pay your entire bill on time, then you are not subject to any interest charges. You are, in effect, using your bank’s money for free until repayment.

However, if you pay only part of your bill, and have a resultant outstanding, you will be charged interest on this balance. Most credit cards charge interest on the basis of the average daily balance method. In simple terms, they will calculate interest on the actual number of days and actual balance outstanding, rather than on an aggregated monthly basis. 

Interest on Cash Advances

Credit cards have advance cash facility which can be a boon in times of crisis. But it comes with a withdrawal limit and an additional tag of high interest rate. Only withdraw from your credit card if you absolutely have to. The cash advances taken from credit card do not enjoy any grace period and interest is charged from the very day you withdraw and keeps accumulating up to the time you repay it in full.

What happens if I don’t pay my bills completely before the due date?

If you don’t pay your bills completely before the due date, your entire outstanding balance will attract interest rate. In addition, any further spending on your card in the next monthly cycle will be added to your balance and the whole amount will attract interest charges – until the repayment is made in full. If you avail of a cash advance on your credit card, your interest-free period is no longer valid.

All in all, if you do not pay careful attention to your interest charges – how it is charged, on what amount, and for how long – the accumulated interest can creep up on you and make it very difficult to pay back in full. So always keep in mind what your balance is, how much you are paying on it, whether you need a cash advance on your card, and how much you will have to pay for the facility.

Another thing to keep in mind is the late payment charges. You must absolutely make sure that you pay your bills before the due date. Depending on the credit card issuer, you can pay interest charges as well as a late penalty on your outstanding – so keep a track of your payment behavior.

A credit card could be your friend in need, provided you know how to utilize the perks and rewards, and you carefully plan your finances. Make sure you pay your outstanding balance on time and in full every month, to avoid falling into a debt trap with ever-mounting interest payments.  

Need help?

If you are confused about interest rates and charges and need some help on how to choose the right credit card, CreditMantri can help match you with the card that best suits your credit profile and financial requirements.