Credit cards are surely a boon and the best innovation in the banking sector. But, this friendly card can surely spoil your happiness if not used properly and particularly if you fail to do the full payment on time. A credit card holder especially who ignored making the full payment at once can easily relate to the shock they must have gone through when their first bill was generated including the late payment fee.
People generally look for the details like the annual fees, card-renewal fees, add-on cards, reward points, etc. kind of information which is not going to help you more than knowing the calculative part behind. Having said that, it is quite understood that we are busy but we must know the calculation of the interest rate that we have to pay. So, before you apply for a credit card or if you already have one, you must know how the interest calculation is done.
Now, it is important to understand as a cardholder that the charges are paid on a monthly percentage interest rate which is generally 2-3% per month and is calculated on an average daily balance method for almost all the credit cards in India. The simple formula behind the interest calculation is:
Credit Card Interest Formula
Interest calculated= [(Outstanding amount X 2.50% p.m. X 12) X Number of days] /365
What about the grace period?
Having said that, you must be aware of the fact and facility-the grace period, provided by the bank for the convenience of the customers. This grace period is the duration where there are no charges for the repayment of the outstanding amount of your bill. In simple terms, a customer gets a particular period of time generally 20-60 days extra in addition to the normal monthly payment. However, the grace period from bank to bank and from a card to a card.
For instance, you a card with the interest-free credit card online that is the grace period of 55 days. Now, the billing date falls on the 4th of the month and hence you can spend within the credit limit from the 5th of the month to the 4th of the next month. Hence, the bill will be generated on the 4th of May and the due date will be 29th of May. So, if you used your card on 14th of April, your grace period will 46 days and if you have used it on 2nd May, your grace period will be 23 days.
Is interest applicable on the cash withdrawals?
Yes, totally. Even if you have been given the opportunity to use your credit card for cash withdrawals, it is always advisable to do it in a case of an emergency. Because the cash advances through the credit card do not have any grace period and the interest will be charged from the moment you withdraw the money till the time you make the ‘full’ payment. Hence, if the outstanding balances are fully paid every month, there is no grace period for you.
Let us take an example that Bank A charges ₹350 as the late payments fees for the bills up to ₹10,000. Also, let us assume that there are no outstanding balances before 10 November and the credit card bill has to be repaid before 18th of every month. The interest rate applicable on the card is 2.65% per month and the late payment is ₹350.
So, here is your usage and the payment details:
- On 10 November- Purchased a mobile phone worth ₹15000 through your card
- On 15 November- Order something online for ₹5000
- On 18 November- Statement gets generated
- On 15 December- Made the payment of ₹2000 against your bill
- On 16 December- Again bought something worth ₹1000
- On 17 December- Paid ₹15000 against your bill
Noe, as you can see the payment was not on time, so the entire outstanding amount will add interest rate and a late payment penalty. Hence, the charges at 2.65 per month rate are calculated from the statement date as follows:
- From 18 November to 15 December (28 days):
[(₹15000X 2.65X12X28)/365]/100= ₹365.91
- From 15 December to 17 December (3 days):
[(₹15000X 2.65X12X3)/365]/100= ₹33.97
- From 18 November to 17 December (30 days):
[(₹15000X 2.65X12X30)/365]/100= ₹130.68
- From 17 December to 18 December (2 days):
[(₹15000X 2.65X12X2)/365]/100= ₹5.22
- From 16 December to 18 December (3 days):
[(₹15000X 2.65X12X3)/365]/100= ₹2.61
So, the total payment from your side will include:
- the total interest= (365.91+ 33.97+130.68+5.22+2.61) = ₹538.39
- Late payment charges = ₹350
- Total principal amount outstanding = ₹4000 (₹1000 fresh spend + balance ₹3000 outstanding from last month’s billing period)
Hence, Total Amount Due = Sum of the above three payments= ₹4888.39 + service tax as applicable on interest and other charges. In addition to this, there will be some cash advances fee, over limit fees, annual fees and other charges also need to be paid.
Hence, with the help of the above example, it will surely be easy for you to understand how credit card calculator works and the importance of the timely full payments.