This is how interest is calculated on credit card balance

Credit cards constitute a sizable part of money spending in the Indian economy. With them we get freedom to purchase any item of our choice now and pay the amount later. Nevertheless, very few people are in know of the thing that how interest is calculated on the credit card transactions. Here we will let you know about the same.

Knowledge about how interest is calculated is an important approach towards using credit card more effectively.

There are two kinds of interest rates credit cards normally charge – fixed & variable.

Variable interest rates are subject to change and banks notify customers before bringing any alteration to the existing rates.

Interest rate is also known as Annual Percentage Rate (APR).The bulk of credit card companies use anAverage Daily Balance Method to calculate interest charges. This means your interest is compounded based on your daily balance.

1.Calculation of Average Daily Balance

To calculate it let’s assume that in a  30 day period you have Rs 1000 balance that is being carried over from the last month. The bank charges 14% interest rate as Annual Periodic Rate of interest (APR). So, in the earlier part of the month you don’t make use of your credit card. But, on the 11th day of the month you use it to pay Rs 400.

Balance for the first 10 days = Rs 1000

Balance for 11th to 30th day = Rs 600

Now, you can get Average Daily Balance you add up the total daily balance in the month and divide it by the total number of days in the month.

(10*1000) + (20*600) = 22,000

22,000/30=733.4

2. Calculation of Periodic Interest Rate

APR/365 = 0.14/365=0.00038

The periodic (or daily) interest rate comes out to 0.038%.

3. Interest Rate for the Month

Periodic Interest Rate * Average Daily Balance * 30

733.4*0.00038=0.279

0.279*30=8.36

Interest charge for that month is Rs 8.36.

Points to remember

The interest is charged from the date of purchase, not from the beginning of the next month.

There is no grace period unless you pay off complete balance at the period’s end.

**Average daily balance method for credit card = (days in billing cycle/365) (Annual Percentage Rate) (Average Daily Balance).