If you are one of those looking to avail of a credit card, one of the important questions you may ask is – “what is finance charges or interest rate on credit cards?”. In case you are new to credit, you may think it to be an unimportant aspect of a credit card. After all, before you avail of a credit card, there are several other important things you must be aware of, such as annual charges, late payment fees, credit card cashback, discounts, rewards, and various other benefits. However, while such aspects are without any doubt important, credit card finance charge also is a critical aspect you must know before opting for a credit card. Not being aware of this aspect may make you pay hefty outstanding dues on credit cards unknowingly, which may make the credit rating agencies such as CIBIL, Experian, CRIF Highmark and Equifax reduce your credit score considerably.
So, what are credit card finance charges or interest rates?
When you use a credit card to conduct a transaction or purchase a product or pay for a service, you are basically availing a loan from the card issuer from the credit limit provided to you. You require repaying the same borrowed money in full within a specific time period or due date set by the credit card issuer to prevent yourself from levying any additional charges like credit card finance charges or late payment fees.
Basically, the credit card’s due date is fixed at around 40 to 52 days from the beginning of the billing cycle. During the time window, no additional fees are incurred on the spent amount, which is the reason for it being an interest-free period. However, if you do not repay the credit card outstanding due in full by the due date, you are charged finance charges of as high as 52 per cent per annum. So, ensure to repay the outstanding due in full on time to avoid finance charges. This is not just it; besides finance charges, your credit score is even negatively impacted, which further on lowers your chances of availing of a loan in the future. Thus, you must ensure to check free CIBIL score periodically through online financial marketplaces to see where you stand. In case your credit score falls, you may instantly take the correct measures to correct it and keep it intact.
What’s meant by the MAD or the minimum amount due on a credit card bill?
Credit cards may give you a choice to pay only the minimum due amount. Do not be tricked by it. This is the minimum amount that you require paying, so the bill will get marked as paid. However, this is not without any consequences. Due on credit card, which is unpaid, is carried forward with an additional daily interest amount for every day. In most scenarios, issuers must stay upfront with you regarding the amount. You may typically view a warning on your card statement that notifies explicitly of the interest accrued on not paying the levied amount. So, ensure to repay the entire amount in full on time.
Thus, if you fail to make payment of a part of your credit card due within the due date, you begin to incur interest fees on the outstanding figure. The rate at which the interest is charged is what is known as the credit card rate or interest of credit card finance charges.
Let’s understand this with an example –
Suppose you hold a credit card and fail the make the payment of the due of Rs 30,000 in full by the due date. So, you will incur an interest amount on the outstanding value, i.e., Rs 30,000 if you. Note that interest on this specific outstanding value will get computed from the date on which you have transacted. This is not just it; you will also require paying a late payment fee if you miss out on your outstanding credit card payment.
What are credit card finance charges in India?
The credit card interest rate in India is not the same for all credit cards. Based on the kind of credit card you use and the terms set by the issuer, the interest rate on the outstanding credit card balance may differ between 2 and 4 per cent per month. This crucially amounts to between 20 per cent and 52 per cent per annum, which is extremely high. To avoid incurring a high fee, it is necessary to repay the credit card due in full and on time.
How’s credit card interest computed?
To make sure you do not accumulate huge interest charges, it is important to know how the interest constituent is computed in the first place. The following formula is incorporated to calculate the interest constituent on the outstanding due on your card.
Interest charges = (outstanding credit card due X rate of interest per annum X number of days from date of transaction) divided by 365.
So, let us take the instance we saw previously. According to the details discussed, an outstanding balance of Rs 30,000 from 7th October 2022 is due on 1st December 2022 with an interest rate on the card of 3 per cent per month. So, the interest constituent charged on non-repayment on time if you delay by 62 days will be = (Rs 30,000 X 36 per cent X 62) divided by 365 = Rs 1835.
It sums up all you must know regarding credit card finance charges and how it works. As the interest constituent charges on your credit card may be extremely steep, it is recommended to pay the outstanding amount on time and avoid using a credit card for cash withdrawal or anything unnecessary. Just ensure to use the credit card as per your repayment capacity.
Frequently asked questions about credit card finance charges
What’s the monthly rate of interest on a credit card?
Monthly finance charges on credit cards in India differ from one credit card to another. Basically, it ranges anywhere from 2 per cent to 4 per cent per month or may be higher than this. Ensure to check out the terms linked with credit cards and their finance charges before availing of them.
What’s the rate of interest on cash withdrawal through a credit card?
The rate of interest on cash withdrawal through a credit card is almost the same as applicable finance charges if you fail to repay the outstanding balance on your credit card. So, the rate may range anywhere between 2 per cent and 4 per cent per month, based on the credit card you opted for.