One of the factors that define your credit card usage is the applicable interest rate. It determines how freely or frugally you will use your card, and also the ease with which you can pay your credit card bill. However, don’t forget that there are ways to obtain an economical interest rate and best of all, avoid paying any interest, to begin with.
To understand the nuances, here’s a closer look at all you need to know about credit card interest rates.
A good credit score can fetch you a lower credit card interest rate
Credit card issuers normally decide the interest rate based on your financial profile. The higher your credit score, the lower the interest rate will be. Since your credit score summarises how you have managed credit in the past, your issuer will be happy to give you a lower interest rate when your score is good as there is less risk involved.
Your outstanding defaults are calculated inclusive of the monthly percentage rate
Every time you make a purchase, a transaction is recorded and the same is charged on your next statement. However, if you pay only a part of this, then the remaining amount is considered an outstanding due. When calculating your subsequent statement amount, issuers take the residual dues from the previous billing cycle into consideration clubbing it with a monthly percentage rate or MPR. This rate not only varies depending on your credit score but also from one issuer to the next. Monthly rates are obtained by dividing your annual percentage rate by 12.
Interest payments vary as per the transaction date
Consider that your credit card bill is issued on the 20th of every month, your interest rate is 15%, and you need to pay your dues within 14 days from the statement issue day in order to avoid an interest charge. Now, assume that you made a purchase worth Rs.10,000 on 3rd January 2019 and a purchase worth Rs.5,000 on 10th January 2019. The statement issued on 20th January will have an outstanding amount of Rs.15,000 payable by 3rd Feb 2019.
If you fail to do so then the purchase of Rs.10,000 will incur interest at a 15% rate for 31 days (28+3) and the purchase of Rs.5,000 will incur interest for 24 days (21+3).
Payments made within the interest-free period do not incur interest
Now that you know how interest is applicable, understand that the best way to avoid this is to pay your credit card bills in full, during the interest-free period. In the above example, the billing cycle was set to the 20th of every month and you had a 14-day grace period to make your credit card payment free of cost!
Failure to pay the outstanding balance will cause interest to compound
When you obtain your bill, you will find two options for credit card bill payment: either pay the minimum balance or clear the entire bill. While the first will keep your card active, remember that any outstanding balance will attract interest. Further, if you don’t clear this amount for more than a month, it will get added to your bill amount and you’ll keep incurring interest on an increasingly high sum.
The credit card interest rate is linked to the annual percentage rate (APR)
When scouring websites to find the best credit card in India, you will frequently come across a term called Annual Percentage Rate or APR. In general, an APR takes into consideration various fees and interest rates and gives you a complete cost of borrowing. However, unlike other financial solutions, when it comes to credit cards, your APR equals your interest. Based on your issuer you will find different APRs for purchases, cash advances, penalties, and balance transfers.
Cases in which your transaction will attract credit card interest
To sum up, here are some of the most common instances for which you will have to pay interest.
- When you make just the minimum payment by the due date.
- When you fail to make any payment by the due date.
- When outstanding dues are carried forward from previous statements.
- When you withdraw cash using your credit card.
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