Credit card interest is important for your high credit score. If you are paying higher interest every month then your credit score will be probably low. Some would find it difficult to calculate credit card interest. It may be done using hand calculation. If you think it is a bit difficult, you must go for credit interest calculating applications and websites such as CRED.
Credit card interest becomes mandatory as it will lead to credit card debt. If the interest you are paying increases, then the risk of credit card debt also increases. For this, you need to know how to reduce credit card interest for maintaining a good credit score.
1) What is Credit card Interest?
Generally, you need to pay a sum of the amount as an additional fee for borrowing the money which is known as Credit card Interest. But this will be an exceptional case for those who are paying their bills within the due date.
By using a credit card,s you will be advised to repay the amount you use, known as credit card bills. In this credit card bill, you are provided due date. Within the due date, you should need to repay the amount. When you missed paying the bill you are charged with interest for the amount you used.
This interest varies depending upon the bank and the type of credit card you used. This interest can also be collected annually which is known as the Annual Percentage rate (APR). For Example, 8.74% is the APR of Visa Classic card. An important note is that there is 0% of interest for those who were paying the bills within the due date.
Below provided the interest rates of some of the top-rated credit cards
- HDFC Bank Regalia Credit Card has an APR of 41.88%. This means your daily interest rate is 0.114% and your monthly interest rate is 3.49%
- SBI Prime Credit card holds an annual interest rate of 40.02%. This means your daily interest rate is 0.109% and your monthly interest rate is 3.33%.
- ICICI Bank Platinum Chip Credit card holds an annual interest rate of 40.08%. Then your daily interest rate is 0.1098% and your monthly interest rate is 3.35%.
2) How is credit card interest calculated?
Calculation of credit card interest includes a three-step process such as
- Determining the daily rate.
- Finding your average daily balance.
- Final calculation using this information.
2.1) Determining the daily rate
As said earlier there will be an APR for every credit card. This is your annual interest rate. If you don’t know where to find the APR just look through the credit card statement. All the credit card statement carries the APR.
Since we need to find the daily rate divide the APR by 365. Some banks and credit card companies would have divided it by 360 to make them easier. However, there will be no more varying differences.
Assume that your APR is 40%. Then divide the 40 by 365.
40/365 = 0.1095%
Here 0.1095% is known as the daily interest rate of your credit card.
2.2) Finding your average daily balance
First of all, go through your statement. It has the number of billing days. From that, you come to know how many days we need to consider for the calculation? and how much balance you had on those days?.. Because interest is calculated only from those balances on each day.
Start your calculation from the unpaid last month’s balance. After that whenever you swipe your card the standing balance goes up. If you make any payment to the credit card company within this interval then the balance will go down.
Keeping these things in mind look for the each-day balances on your credit card. Add all those balances and divide them by the number of billing days. Then the result produced is your average daily balance.
2.3) Final calculation using this information
First, multiply the daily interest rate and average daily balance. You will get a result. Multiply the number of billing days mentioned in the statement. You will get the final result. This is the actual amount you need to pay as interest.
There will be a variation in the calculation based upon the compounding interests monthly or on a daily basis. By this, you are put into the situation where you are paying interest to the interest.
Due to this, you should pay more than that your APR. If you pay Rs.180 as interest in a normal scenario, but when the interests are compounded you should pay more than Rs.180 for eg, Rs.195.
There is a simplified formula for calculating the credit card interest: “(Number of days from the date of transaction x Entire outstanding amount x monthly interest rate x 12 months)/365”.
3) How does credit card interest work?
As said earlier credit card interest is for only those who have a standing balance after the completion of the due date. Let us consider 3 scenarios and how much interest should you need to pay on that scenario?.
3.1) Scenario 1: You are paying the full amount
In this case, you are paying the full amount in the credit card statement. Also, you are paying it within the due date. So you no need to pay any type of interest in this scenario. Whatever may be the APR you will be charged only a 0% interest rate.
3.2) Scenario 2: Making a partial payment
As there is a standing balance in this scenario you would need to pay the interest. Let us assume
- You have a bill amount total of Rs.10,000 carrying a monthly interest of 3.5%.
- A partial payment of Rs.5,000 is paid within the due date.
- So now you have a standing balance of Rs.5000
- For billing days before the due date, the interest charged is Rs.241.56.
- If you are paying the standing balance after 15 days from the due date, interest for these 15 days is Rs.86.4
- So the total interest you need to pay is 241.6 + 86.4 = 328. In this way, total interest is calculated for partial payments.
An important note is that you won’t use a credit card to reduce the interest after the completion of the due date. Otherwise, it will lead to credit card debt.
3.3) Scenario 3: Paying the minimum balance
In this case, you are paying only the minimum balance mentioned in the credit card so that the remaining amount will be the standing balance. You need to pay the interest that is compounded monthly or daily until you clear your standing balance. If you make transactions with a large standing balance, it will make the situations more complex.
To know more about: How much should you pay on your credit cards?
Hereby concluding that paying the minimum balance or partial balance is not highly recommended. It will be considered to be okay if you have undergone any financial struggles. You can also take a loan and pay the credit card bill in full. For better usage of credit cards, use it within the 30% of credit limit and pay it within the due date. This maintains a good credit score.
You can calculate the credit card interest simply by using the formula “(Number of days from the date of transaction x Entire outstanding amount x monthly interest rate x 12 months)/365”. or you can use the credit card EMI calculator available in all credit card company websites.
Generally, It is a kind of additional fee imposed for late payment of bills and for having the standing balance in your credit card account.