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.
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)]
Example -
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.
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