Before getting a Credit Card, it is crucial to understand the interest rate, when it is applied, and how it is calculated. Despite seeming complex, it is more manageable than it appears. Learn how Credit Card providers calculate their interest rates and what you can do to keep yours low. Credit Cards and interest rates go hand in hand.
Just like repaying Loan instalments, you need to pay an interest rate when you settle the Credit Card bill after a specific interest-free period. The bank levies Credit Card interest rates or finance charges on the borrowed amount or transactions outside the interest-free period. The interest rates can differ based on your Credit Card type.
How is the Credit Card interest rate calculated?
In India, banks typically determine the Credit Card interest rate based on the Annual Percentage Rate. This rate is calculated annually rather than monthly. However, when calculating the interest on your monthly dues, banks use the Monthly Percentage Rate for your transactions. The APR and MPR differ among banks and Credit Cards.
Understanding the APR helps you manage your finances more effectively and choose a Credit Card that aligns with your financial goals and needs.
When is Credit Card interest charged?
Interest rates affect your total outstanding Credit Card balance. Usually, banks charge interest in the following situations:
Delayed payments
If you cannot settle your Credit Card bill on time, on or before the due date mentioned in your statement, the bank applies interest on the outstanding balance amount.
Making minimum payments
When you pay only the minimum amount instead of the full outstanding amount, the bank charges interest on the balance. This interest will continue to accrue until you clear all the dues.
Partial payments
Credit Card interest rates apply to the balance amount when you pay less than the actual bill amount.
Cash withdrawals
If you use your Instant Credit Card to withdraw cash from an ATM, you must pay interest on it. The interest on such advances is usually higher than the interest applied on regular transactions.
Factors affecting Credit Card interest rates
- Credit scores
Many things can affect the interest rates on credit cards. One important factor is your credit score, which shows how you have handled your finances and credit in the past. If your credit score is high, say 750 or more, then the bank may offer you the card at attractive interest rates.
- Repayment history
Your repayment history reflects your credit behaviour and ability to settle dues. If you have been regular with repayments and have minimal outstanding dues, you could qualify for a Credit Card at a lower interest rate.
- Credit utilisation ratio
When setting your Credit Card interest rate, the bank considers your credit limit and usage percentage. Keeping usage below 40% shows responsible use, boosting your creditworthiness and potentially lowering your interest rate.
Knowing these points helps plan your finances better while increasing your credit score.
