Decoded Lesser Known Facts about Credit Card Interest Rates

Whether you are new to the world of Credit Cards or have been using them for some time, it is essential to know about some of the keys aspects of plastic money. Despite all the benefits and advantages that Credit Cards offer us, they could turn into one of the most expensive credit products.

Depending on the Credit Card you are using, the APR can be up to 48%. Thus it is important to place discipline in using Credit Cards. Else, you can easily walk into a debt trap.

Thus, we have shared below some of the lesser-known facts about Credit Card interest rates so that you can make most of your plastic money.

• Interest-free period: Banks do not levy interest on your Credit Card transactions from day one. As a matter of fact, every Credit Card comes with an interest-free period that can go up to 50 to 55 days. This interest-free period is available only if you repay the entire amount payable before the payment due date mentioned in the Credit Card statement. But if you fail to repay the entire due on time, the bank will levy the interest on the outstanding amount on per day basis and will continue to charge you till the entire amount is repaid.
• Retail Finance Charge: Do not be confused about reading this charge in your Credit Card statement. It denotes the interest rate post the due date. Every time you receive the bill, do a quick calculation to see if there are any errors in the calculation from the bank. If any, raise a dispute immediately.
• Interest is charged on a daily basis: When you receive your Credit Card, if you closely read the documents annexed along with, there will be mention of the interest rate in monthly terms as well as yearly terms. But in reality, Credit Card interest is calculated on a daily basis. A daily rate is calculated by dividing the annual interest rate by 365. Then the daily rate is multiplied with the average daily balance of your Credit Card for the month. This is the total interest cost that you have to bear for the entire month. Let’s have a look at an illustration to understand this calculation better.

If you have an SBI Credit Card at a finance charge of 3.35% per month or 40.2% APR, your daily rate is 40.2% divided by 365, i.e., 0.11% per day.

Let’s assume that your monthly transactions with Credit Card are Rs. 60,000. Now, divide this by 30 (days in the month), and your average daily balance comes out to be Rs. 2,000.

Now multiply the daily rate with average daily balance, i.e., 0.11 x 2,000 = Rs. 220, which is the interest you will be paying daily against your SBI Credit Card. So, for the entire month, your interest cost will be Rs. 220x 30 = Rs. 6,660.

Though, if you make any payment towards your Credit Card in between the month, the interest cost will be reduced proportionately.

• Different transactions can have different interest rates: You might not know this, but it is true that not all transactions are subject to the same APR. The credit companies charge different APR for transactions like Air Ticket Purchase, Fuel Purchase, Dining Expenses, Grocery Purchase, etc. Further, if you use the Credit Card at partner outlets, the APR is reduced further. Similarly, if you withdraw cash with your Credit Card, then you will be subject to the highest APR.
• There are different interest rates: The interest rates charged by the banks against Credit Cards, as well as the APRs, never remain the same throughout the year. Banks are at their liberty to change the APR periodically according to their policies, but it is essential for them to intimate you regarding upcoming changes. There are Credit Cards that come with fixed APRs, and then there are Credit Cards with variable APRs. Sometimes banks give promotional interest rates against new Credit Cards for a limited period. After the offer is lapsed, normal APR is charged as per the prevailing rate.
• Interest rates vary according to users: If two customers are holding the same Credit Card from the same bank, it does not mean that their Credit Card interest rates will be similar too. Banks charge APR according to the user profile, credit history, and repayment patterns. So, the customers who exhibit financial discipline and are regular with repayments will be offered lower APR as compared to a customer who regularly defaults on the repayments. Banks change interest rates according to the internal risk evaluation report, which is generated on a periodic basis.
• You can ask for a lower interest rate: Yes, sometimes it can be as simple as giving a call to the customer care department of the Credit Card company. Ask them about any possibilities about a reduction in the interest rates. Sometimes, there are promotional offers available wherein your Credit Card interest rates can be reduced. You can tell them about the better offers that you are getting from another company. This usually does the trick as the company does not want to lose out on a valued customer.

Now that you know about various intricacies associated with Credit Card interest rates, make sure you undertake all measures possible to reduce your interest cost. Credit Cards can offer some noteworthy benefits, but only if you use them with financial discipline.

Also Read: Top Credit Cards in India

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