How is Credit Card Interest Calculated?

Credit card is what we call a revolving credit account. The issuer extends a credit limit to you against which you can make purchases and the same will be deducted from your limit. As you pay off the bills, the amount is added back to your available limit.

Now, unlike loans, you have the option to make a partial payment or no payment towards your card and ‘revolve’ the balance to the next billing cycle. This exercise, however, is not free of cost. This is when credit card interest rate becomes applicable. So, if you keep paying your credit card bills in full every month, you will not have to pay interest on it.

The scenarios under which credit card interest rate come into effect are:

No Payment Made by Due Date – Under this case, the customer will incur both late payment charges and credit card interest rate.

Only Minimum Amount Due is paid – In this case, the user will incur credit card interest rate and it will be applicable from the day of purchase till the full outstanding amount it is paid off.

Cash Withdrawals – Users will incur the interest from the day of withdrawal until the withdrawn amount is paid off in full.

Credit card providers calculate the interest on due amount using the below-given formula.

(Number of days, from the date of purchase till payment is made) x (Full Outstanding Amount) x (Interest rate percentage p.a./365)

Now, let us take the following illustration to better understand how the interest rate will be calculated.

Assumptions Made: Transaction date – 2 December 2020 Transaction Amount – Rs. 10,000 Statement Date – 7 December 2020 Minimum Amount Due (5%) – Rs. 500 Total Amount Due – Rs. 10,000 Amount Due Date – 27 December 2020 Interest rate – 42% p.a.

Case 1 – Full payment is made by the due date

In case the card holder pays off the full outstanding amount by the due date 27 December 2020, he/she won’t have to pay any interest on the credit card.

Case 2 – Partial payment before the due date

Particulars of the case: Payment made – Rs 5,000 Payment date – 22 December Next statement date – 7 January 2021 Other Purchases made between 7 December and 7 January – None

In case of partial payments the customer will incur the interest rate in the following manner:

Total Interest = (Interest on full amount from the date of purchase till partial payment date) + (Interest on the remaining amount from partial payment date till next statement generation Date)

Interest on full amount from purchase date till partial payment date (Between 2 December and 22 December) = Rs. 241.56 [21*10000*42%/365]

Interest levied for 15 days (23 December to 7 January) on remaining amount Rs. 5,000 = Rs. 86.4 [15*5000*42%/365]

Total interest charged = 86.4 + 241.56 = Rs. 328

Case 3 – Partial Payment after Due Date

Particulars of the case: Total payment made – Rs 5,000 Payment date – 29 December Next statement date – 7 January 2021 Transaction done between 7 December & 7 January – Nil

In this case, the customer may incur late payment charges along with credit card interest rate.

The interest rate that customer will be liable to pay will be:

Interest for 28 days (Between 2 December & 29 December) = Rs. 322.2 [28*10000*42%/365]

Interest for 9 days after partial payment date & till next statement generation date = Rs. 51.8 [9*5000*42%/365]

Total interest charged = 51.8+322.2 = Rs. 374

Case 4: Customer makes a partial payment after the due date and makes another purchase

Particulars of the case: Total payment made – Rs 5,000 Payment date – 29 December Subsequent statement date – 7 January 2021 Transactions made between 7 December & 7 January: 1 New transaction amount – Rs. 1,000 New transaction date – 16 December

In this case, the customer will incur late payment charges along with credit card interest rate.

The interest rate that customer will be liable to pay will be:

Interest levied for 15 days (Between 2 December & 16 December) = Rs. 172.6 [15*10000*42%/365]

Interest levied for 13 days (Between 17 December & 29 December on balance of 11000) = Rs. 164.5 [13*11000*42%/365]

Interest levied for 9 days (Between 29 December & 7 January on balance of Rs.6000) = Rs. 62.13 [9*6000*42%/365]

Total Interest Amount incurred = Rs. 399.23 [Rs. 172.6 + Rs. 164.5 + Rs. 62.13]

Do note that in this case customer will have to pay both the interest rate and late payment charges.

Case 5: Cash Withdrawals

Particulars of the case: Amount Withdrawn – Rs. 10,000 Date of Withdrawal – 2 December Date of payment of withdrawn amount – 5 December

The customer will be liable to pay both the credit card interest rate and cash withdrawal charges (generally 2.5% of the amount).

Number of days on which interest will be applicable = 4 (2^nd December to 5^th December)

The interest will be = Rs. 46.03 [4*10000*42%/365]

Credit cards usually come with an interest-free period of up to 50 days. During this period cardholder does not have to pay the interest accrued on the purchases. This facility is only provided to those customers who pay off the outstanding amount by the due date.

The extent of the period is calculated in relation to the statement generation date, purchase date and due date. For example;

Let us assume that the statement generation date is 14^th of the month and the due date is 4^th of the subsequent month.

Now if the user makes a purchase on 15^th May, he/she will get an interest free period of 50 days. (15^th May to 14^th June = 31 days| 15^th June to 4^th July = 19 days.)

On the other hand, if a purchase is made on 14^th June, the cardholder will get an interest free period of 20 days only. (14^th June to 4^th July = 20 days)

Important Points to Remember Cash withdrawals are generally not eligible for interest-free period If you do not pay the full outstanding amount by the due date, new purchases will not be eligible for interest-free period If you don’t pay the Minimum Amount Due, you will also incur late payment charges

Will Credit Card Interest Rate be applicable on balance transfer as well?
Credit Card providers may charge a lower rate of interest in case of balance transfer initially. After the initial period is over and customer has not paid off the balance amount then credit card interest rate will come into effect.

Will credit card interest rate be applied if I convert my outstanding amount into EMIs?
No, credit card interest rate won’t be applicable if you convert your outstanding amount to EMI. However, interest on EMI will still be applicable but it is much lower than credit card finance charges.

What is the average rate of interest charged on credit card in India?
Most credit cards charge between 39.00% to 42.00% annually.

Is interest-free period available when users carry forward their outstanding amount?
The credit-free period is not available to users who do not settle their credit card bill by the due date. In fact, it is on that outstanding amount which accrues interest charges.

Reserve Bank of India has asked all credit card providers to offer payment deferment option to their customers. This scheme was brought out to provide much needed help to people affected by the COVID-19 Lockdown. During this period customers won’t be charged a late fee if they fail to pay their bills. The moratorium period, which was initially announced for only 3 months ending on 31-May-2020 is now extended till 31-August-2020.

Benefits of Moratorium	Drawbacks of Moratorium Period
Credit score will not be affected if the bill is not paid Card will not be blocked if the bill is not paid (unless specified otherwise) Late payment fees won’t be charged	It only allows the user to pay their bills at a later date. Hence credit card interest rate will still be applicable on the total outstanding amount.

How is Credit Card Finance Charge calculated for the Moratorium Period

Let us understand how credit card interest rate will be charged during the moratorium with the help of an example:

Assumptions made: Transaction date – 2 March 2020 Transaction Amount – Rs 20,000 Statement Generation Date – March 7, 2020 Total Amount Due – 20,000 Due Date – 27 March 2020 Assumed monthly interest rate – 3.5% Previous credit card bill was paid in full No other transactions were made

 Total Amount – Rs. 20,000 as on 2^nd March

Next Due Dates – 27 June 2020 | 27^th of all subsequent months

Credit card interest rate calculation:

Interest levied for 6 days (Between March 2 and March 7) = Rs. 138.08 [6*20000*3.5%*12/365 = 6.904]

Interest levied for 31 days (Between March 8 and April 7) = Rs. 713.42 [31*20000*3.5%*12/365 = 35.67]

Interest levied for 30 days (Between April 8 and May 7) = Rs. 690.41 [30*20000*3.5%*12/365 = 34.52]

Interest levied for 31 days (Between May 8 and June 7) = Rs. 713.42 [31*20000*3.5%*12/365 = 35.67]

Total interest accrued: 138.08 + 713.42 + 690.41 + 713.42 = Rs. 2,255.33

Total amount payable after 3 months will be Rs 22,255.33 (20,000 + 2,255.33)

This is the total due amount that will be reflected in cardholder’s June’s credit card statement.

However, if the user avails the extended moratorium as well then the Interest accrued will be:

Interest levied for 30 days (Between June 8 and July 7) = Rs. 690.41 [30*20000*3.5%*12/365 = 34.52]

Interest levied for 31 days (Between July 8 and August 7) = Rs. 713.42 [31*20000*3.5%*12/365 = 35.67]

Interest levied for 31 days (Between August 8 and September 7) = Rs. 713.42 [31*20000*3.5%*12/365 = 35.67]

Now, the Interest accrued in the second Moratorium Period will be Rs. 2,117.25 [690.41+ 713.42+ 713.42]

Total Interest that became Payable post 31^st August 2020 = Rs. 4,372.58 [2,117.25+2,255.33]

Total Amount Payable in September’s credit card bill = Rs. 24,372.58

Who can opt for the Moratorium Period

Almost all credit card providers will automatically extend the moratorium period to cardholders if they fail to pay the bills between 1 March 2020 and 31 August 2020. However, we still advise you to opt for it using the method specified by your card issuer.

Should you Opt for the Credit Card Moratorium?

The moratorium lets the user pay the outstanding amount after 6 months. However, it does not mean that the user is provided with interest waivers or concessions. Hence, we suggest you opt for the moratorium only if your income or cash flow is affected by the current situation.

Suggested Read: Should you opt for the moratorium for your credit card dues?