Credit Card Interest Rates: What is it & How it Works?

You may need help to understand your credit card interest payments as a consumer. Banks charge interest on credit card balances, but the answer is not a black-and-white yes or no. Credit card interest rates are not imposed arbitrarily but depend on several complex factors for a layperson.To understand the complexities of cc interest rates and use the card more efficiently, let's decode some essential facts about it. Also read: Credit, Debit or ATM Card - What the Difference?

• It is possible to avoid credit card penalty charges entirely in India. If you clear your outstanding dues before the due date, no interest is applicable for later payment.
• You are liable to pay interest on your credit card in two scenarios: When you pay only a part of your dues instead of settling the entire outstanding bill amount and if your payment is lower than the actual amount due.
• Your credit card account statement will mention a due date within which you must clear the bill. Failing to do will lead to a penalty applicable to the borrowed amount.
• All financial institutions charge interest rates as an APR- Annual Percentage Rate. The amount is levied on the outstanding balance, computed on a Monthly Percentage Rate MPR. Calculate the grace period yourself, from the date of purchase till the due date.
• Most financial institutions will allow you to convert your accrued dues into convenient EMIs at low-interest rates. An instalment will increase your financial burden in the long run but ease it immediately.
• Always review your credit card statement to understand the potentially applicable charges. You may see your account statement by email, internet banking, or a mobile banking app. A paper record of your statement is also available upon request.

Also read: Do You Have a Credit Card Yet? Know these 3 Reasons That Will Convince You to Get One Now

Your credit card interest rate is calculated for the entire year as the annual percentage rate (APR) of charge. When financial institutions calculate your monthly dues, MPR or monthly percentage rate is applied to the transactions pertaining to the month. Both APR and MPR differ from card to card and financial institution.To understand this better, let’s take an example:

When you clear your dues in full by the due date, no interest is levied.

Taking the above example in consideration, if you default your credit card payment by the due date i.e., 26th June, interest is charged. It is also charged when you make a partial payment before the due date. Here is how financial institutions can levy interest on credit cards:Partial payment before due date: ₹ 5000Interest on ₹20,000 for 21 days: [(21 x ₹20,000 x 3% x 12)] / 365 days = ₹414.24Interest charged on the ₹15,000 balance for 15 days: [(15 x ₹15,000 x 3% x 12)] / 365 days = ₹221.91Total interest due: ₹414.24 + ₹221.91 = ₹636.15Partial payment after due date: ₹ 5000Interest on ₹20,000 for 28 days: [(28 x ₹20,000 x 3% x 12)] / 365 days = ₹552.33Interest charged on ₹15,000 balance for 9 days: [(9 x ₹15,000 x 3% x 12)] / 365 days = ₹133.15Total interest due: ₹552.33 + ₹133.15 = ₹685.48

Credit card users also have an interest-free period. During this period, no charges are levied for making a purchase. The credit card interest-free period is usually 45 to 55 days, beginning from the first day of your billing cycle.No interest is charged if you repay the loan in total during this period.

Dates to note

You must look out for two dates on your monthly credit card account or payment: Statement Date and Due Date.The day the bank generates your credit card statement for the previous month is called the "Statement Date." The Billing Date is synonymous with this date.The "Due Date" is the date by which you must make the full payment of the stated amount.The grace period between those dates is during which you may pay the bill fully without incurring interest. Also read: How To Use Credit Card Wisely and Smartly?

Example

Let us understand this with the help of an example. Assume that your bank generates a statement for your credit card on the first of every month. Thus, the statement date for June shall be 1st July. This statement shall contain a bill for all the expenses you swiped your credit card for during June, i.e., 1st June to 30th June.Let us assume that your due date is between 20th-25th of July. If you purchased at the start of the month, say 1st June, you enjoyed an interest-free credit of almost 50 to 55 days. However, if you bought at the end of the month, say 30th June, then you only enjoyed a credit-free period of 20 to 25 days.

Credit card penalties can be overwhelming and detrimental to your credit score. Here's how to eliminate credit card penalty rates:

• Be punctual. Set reminders and automatic payment options that will enable you to pay your interest on time.
• Stay within your credit limit. It is essential to track your credit limit regularly. You can always lower the limit to stay safe and avoid paying unnecessary penalties for discretionary transactions.
• Use an overdraft account. How you pay your credit card dues matters, especially if your checking account has insufficient balance. In a scenario like this, penalty charges are inevitable. On the other hand, using a checking account with an OD facility ensures you make timely payments of your dues.

Credit card interest rates levied by financial institutions*

*Subject to change Also read: Credit Card Guide: What Are They and 3 Different Types of Credit Cards

Did you know cc interest rates in India vary from card to card? Always strategically plan your purchases to get the most out of your credit card feature. Being on top of your spending habits ensures you stay within your credit limits, leaving you in a tight spot to clear your monthly dues.You make better financial choices when you take advantage of interest-free periods and learn to calculate applicable interests. When fully aware of your options, you can better strategise your finances. Also read: What is Credit Card Balance Transfer and How it Works?