The credit card interest rate is applicable to the outstanding balance that a user has not cleared before the due date.
Accrual of interest only arises when a cardholder has –
- Paid only the minimum amount due.
- Paid only a partial amount of his or her credit card bill.
- Not paying the total amount due to the due date.
A user will not have to pay any interest if he or she has paid the total amount due before the grace period ends.
Calculation of interest rates on credit card
Financial institutions display the credit card interest rates as a per month rate. It is sometimes annualized and called the annual percentage rate or APR.
However, the interest rate is charged on a daily basis on the outstanding amount. The general formula to calculate interest is –
Number of days the balance is overdue x outstanding amount x [(interest rate x 12) / 365)]
A cardholder has an outstanding balance of Rs.3,000. Let’s assume that this amount is for 20 days between January 1 and January 21. The rate of interest applicable here is 4% per month.
Hence, the interest will be –
20 days x Rs.3,000 x [(0.04 x 12) / 365)] = Rs.78.90.
Interest on ATM cash withdrawal
Unlike other transactions, there is no grace period on cash withdrawal from ATMs. The rate will be applicable instantly on the withdrawn amount and charged until the bill generation date. Additionally, a cash advance fee is also levied on such withdrawals, which ranges from 2.5% to 3%.
Do note that some credit cards offer an interest-free period on ATM cash withdrawal. The Bajaj Finserv RBL Bank SuperCard is one such card offering a zero-interest period of up to 50 days on such transactions.