How Interest On Credit Card Due Is Calculated?

A credit card entails multiple benefits. Most important one, you can make purchases today and pay at a later date when you have the finances. After the bill is generated, there is a credit free period of 20 to 30 days during which you will have to pay the complete bill amount of your credit card. Failing which, you may have to pay interest on the outstanding amount, as levied by the card provider.You also have the option of paying a minimum balance, which is generally 5% of the total bill amount, in case you don’t have adequate funds to pay the entire bill. This process is known as revolving credit facility. However, this facility comes at a cost. The credit card provider levies an interest on the outstanding bill amount until you make the complete payment..Though the rate of interest depends on the credit card provider, it usually varies between 3 to 5 percent per month.

Below is the general formula for calculating the interest levied on credit card dues:Total interest till date = (Number of days counted from the date of transaction x Entire outstanding amount x Interest rate per month x 12) / 365Let’s understand the use of this formula with the help of an example. Suppose a customer has made a transaction of Rs. 10,000 on his credit card on 1st July, 2019. The billing date is 6th July, 2019. Let’s assume that the credit card provider levies an interest on the unpaid amount at the rate of 3.5 percent per month.The customer made a payment of Rs. 5,000 on 21st July i.e. before the due date. However, he failed to make any more payment until the next billing date i.e. 6th August. Now, let’s calculate the total interest charged on the outstanding amount.Interest levied on Rs. 10,000 for 21 days (1st July to 21st July) = (21 x 10000 x 3.5 x 12) / 365 = Rs. 241.56Interest levied on balance amount of Rs. 5,000 for 15 days (22nd July to 6th August) = (15 x 5000 x 3.5 x 12) / 365 = Rs. 86.40.Total interest charged on the outstanding amount till August 6 = Rs. (241.56 + 86.40) = Rs. 328.

In case the credit card holder pays the “Total Due Amount” before the due date, the interest which is leviable till the due date is reversed and no interest is charged by the card provider. Therefore, it’s always recommended to pay the full bill amount before the due date to avoid these hefty interest charges and subsequent penalty.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.