As a credit card holder or if you are someone who is planning to have a credit card, you must be having a coming question How Credit Card Interest is calculated? Don’t worry, we are here to help you out. In this article, we are going to discuss the interest rate and criteria that companies follow for interest rates.
What is the Credit Card Interest Rate?
Credit Card Interest rate is basically charged by the bank or the financial institution that issues your credit card on the balance amount or credit spent from your credit card.
This amount is generally when you fail to pay your credit card bill before the due date or you convert the same into EMI, If you clear the outstanding amount before the due date then there is no interest rate by the credit card company. So, before we jump into how credit card interest is calculated? it becomes very essential to know how the interest rate is charged by the bank or the financial institution before you make one for yourself.
The limit of the credit depends on your credit score and on the basis of that you might issue a credit having a low rate of interest.
How Credit Card Interest is Calculated?
Your credit card spends are subject to the rate of interest which is known as the Annual Percentage Rate or APR. However, APR is termed as the interest rate for the whole year, your monthly billing showcases the Monthly Percentage Rate (MPR) that is applied to your transactions. These numbers are different for different reasons so It is very important to check APR being charged on your credit card.
The basic Formula to Calculate Credit Card Interest Rate
The formula to calculate Credit Card Interest Rate
Credit card interest= (Total Number of days X Transaction Amount X Credit card Interest per Month X 12 months) ÷ 365 days
For an instance, let’s say you have spent Rs 20,000 to purchase some products using your credit card. And the total number of days from the first transaction date to the credit card payment due date is 28 days. The Interest rate charged by the bank is 3% per month. So, applying the same formula)
Credit Card interest-(28 x Rs 20,000 X36% p.a) ÷ 365= Rs 552.33
On what conditions Credit Card Interest is Charged?
Basically, the credit card monthly interest rate is changed only in these circumstances:
- When you repay only the minimum amount due on the card
- When you pay an amount that is lower than the outstanding due
- When you don’t make your credit card payment
- When you use your credit card to withdraw money from an ATM
- When you purchase items on EMI
What is Credit Card Interest-Free Period?
The Period between the date of a particular transaction to the next payment date is usually known as the credit card interest-free period. During the grace period, no interest is charged.
Generally, the credit card interest-free period is around 45-50 days. However, this varies from bank to bank from whom you have availed your credit card. This interest-free period is only applicable if you make purchases using your credit card, not from any savings or balance transfers.
Also, the credit card interest-free period will be canceled if you fail to pay your outstanding dues before the due date arrives. Interest would be charged on both the outstanding amount as well as the purchase you make.
You have some control over the factors that largely determine your credit card interest rate. A better score will give you a better idea of credit options. And if your score gets improved you can ask the issuer to lower the interest rate and after that, you don’t require to ask yourself how credit card interest is calculated. But regardless of that or what’s stated in APR you can control the lower rate of interest in these ways:
- Pay your bill in full every month, if possible (the best way to avoid Interest)
- If you can pay the full amount of your make sure you had paid the minimum amount.
- Make multiple payments in the month in order to shrink your average daily balance.
Frequently Asked Questions Related to How Credit Card Interest is Calculated
Is credit card interest calculated per month?
Credit card Interest is generally determined by Annual Percentage Rate (APR). However, the Interest rate for the months will be calculated on the basis of MPR i.e., the Monthly Percentage Rate.
How many times a month can I pay with my credit card?
Although card companies allow you to set auto one payment per month. However, there is no limit to making manual payments, you can make as many as you want.
What happens if I pay more than my credit card balance?
There is nothing wrong with overpaying but it will be returned to you. And it will not affect your credit score as well.