How is Interest calculated on Credit Cards?
Do you know that largest number of complaints registered with Banking Ombudsman is of credit cards?
According to the Reserve Bank of India (RBI) Annual Report, the number of complaints in the year 2006-2007 increased by 22% from the year 2005-06. In 2005-06 the number of complaints received were 31,732 which increased to 38,638 in 2006 -07 mainly due to rise in credit card complaints.
The nature of complaints ranged from levying of late payment fee, levying of excessive charges and issuing of unsolicited credit cards etc.
Do you think that only banks are responsible for the rise in number of complaints? Certainly not; we as card holders are equally responsible for it.
We as credit card holders are not even aware of different terms used by credit card issuers and how the charges are calculated still remains a mystery. You need to read to understand the terms and conditions thoroughly but calculation of interest on your credit card and how it is levied is most important factor which you need to learn on priority.
This will empower you to know that how much you need to pay actually. . If you learn this, it will help you immensely as you will know not only the right amount but also the right payment procedure which is not quite practical otherwise.
In credit card terms, interest rate is known as extended credits or revolving interest rate.
Revolving interest is charged to the card holder when he/she fails to pay the entire due amount on the card before the due date.
Look at the example below to get an idea how the interest rate is calculated:
X made purchases on his credit card – a TV for Rs. 10,000 on 01 March 08 and jewelry worth Rs. 5000 on 10th March 08 – both at an interest rate of 3.2% per month. The table below highlights how the interest rate is calculated on these purchases:
|Statement date 20th March 08|
|Amount outstanding||Rs 15000|
|Due date 11th April 08|
|Payment made on the due date||Rs 3000|
|Balance carried forward||Rs 1200|
|Interest rate (3.2% p.m.)|
|a) Intereston Rs 10000 for 41 days ( From 01 March to 10 April)||Rs 404|
|b) Interest on Rs 5000 for 32 days ( from 10 March to 10 April)||Rs 158|
|c) Interest on 12000 for 10 days (from 11 April to 20 April, the next due date)||Rs 118|
|Total Interest charged in 20 April statement||Rs 680|
|Service Tax 12.36% on Interest rate||Rs 84|
|Outstanding due in 20 April statement||Rs 12764|
This table above explains that interest rates are calculated on daily basis on balance outstanding from transaction date. That means if you don’t pay your entire due amount before the due date interest gets calculated from the very day till the due date.
The unpaid amount is also levied interest from the due date till the next billing date – that is for 10 days as per the above table. Now the question arises that on what basis/formula the above interest rates are taken into consideration, the days are calculated.
Here it is:
Outstanding amount x Annual interest rate x No. of days/365
Interesting point here – interest rate is applicable only when you do not pay the entire due before the due date.
Benefits of knowing the interest calculation:
- You may realize that you are paying more than you spend.
- You may avoid unnecessary purchase.
- You may plan your finance better.
- You may pay your due on time or at least before the due date.