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Interest Rates on Credit Cards: What They Are and How They Work

Credit Cards


Interest Rates on Credit Cards: What They Are and How They Work

You are charged credit card interest rates per your credit card agreement. Banks calculate your daily rate by dividing the annual percentage interest rate by the number of days in the year, that is 365, and multiplying your existing balance by that rate. This amount is added to your monthly bill. 

If you have a revolving credit card balance that gets carried over every month, you may have noticed charges as interest on your credit card statement. Do you want to know how credit card interest rates are calculated? If you know some facts about card interest rates, you will be able to make good financial decisions for your family and yourself. Here is everything you want to know about interest rates. 

Credit Card Rate of Interest

The amount you pay for borrowing funds is called finance charges or credit card interest rates. These rates are different for different users and change across credit cards and banks, even for the same user. Before applying for a credit card, you should look into its interest rates. Unlike loans, your credit card’s interest rate has nothing to do with your repayment capacity and credit score. Credit cards have preset interest rates and are charged equally to all customers. 

When do credit card companies charge their interest rates?

The credit card loan interest rate is charged when you take a cash advance or have a pending amount in your card account. These are some situations that may lead to interest being charged on cards-

1. If you do not pay the total amount that is due on your credit card. 

2. If you only pay the minimum amount that is due. 

3. If you withdraw cash using a credit card at ATMs. 

4. If you do not settle or pay any amount towards your credit card bill. 

How are Interest Rates Calculated on Credit Cards?

As long as you have an outstanding balance in your account, interest will be charged daily. It can be a little complicated to calculate your exact interest charge. For example, imagine you have Rs. 2000 outstanding amount on your credit card, and the interest rate is 2.5% per month. Then you will be paying an interest charge on the entire outstanding amount until you settle your bill. Say you make purchases of Rs. 10,000. Now you have 12,000 plus daily interests added, which continues until you pay. With any outstanding balance, all new purchases are subjected to interest, and thus that continues to increase your outstanding amount and the interest charged. 

When you have outstanding balances that are carried forward to the next cycle, the new transactions are also charged with the interest rate. That means you do not get an interest-free period for any new transactions; they are charged with interest from day one. Hence, choosing a credit card with a low-interest rate is very important. Credit card interest rates start from 2.5% to 4% per month. The rates depend on the banking institutions and the card applicant. However, you must always choose a low-interest credit card to avoid future payment issues. 

Compounded interest is charged on a daily basis on the outstanding amount on your credit card. This means the card issuer calculates the interest rate at the end of the day on the unpaid amount in your account. This charge is minimal and is added to your balance the next day, and then a new charge is calculated for that amount and added the next day. This cycle continues until you pay your entire outstanding balance. You must pay your bill in full before or on the due date to avoid paying interest charges on your balance. Most banks offer low-interest rates, such as Bajaj Finserv, which charges 3.99% on credit cards per month. 

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