How Credit Card Interest Rate is Calculated after Due Date?

Updated on: 11 Apr 2023 // 4 min read // Credit Cards
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When an individual uses the Credit Card to make a purchase, she gets the flexibility to repay the dues later on. Each month a Credit Card Statement is generated, and it shares the total outstanding due, minimum due, and the due date for the current billing cycle. If the customer repays the total outstanding amount within the due date, the interest is not charged. However, every time she fails to repay the card bill or carryforwards the outstanding balance to the next payment cycle, she attracts a fixed Credit Card Interest Rate on it.

Credit card interests can be very costly, and thus it is advisable to understand them thoroughly before you swipe your card for online shopping or at a retail store.

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How does Credit Card Interest Rate work?

Although the interest is calculated at a fixed rate every month on the outstanding dues and is added to the balance in each statement, the rate of interest rate is stated as a yearly rate called as Annual Percentage Rate or APR. The credit card interest rates can vary from 18% to 36% p.a., subject to the card provider’s policy and the applicant’s profile.

However, Credit Card interest rate is only applicable on the outstanding amount if it is not repaid within the due date as per the monthly statement. If you make the repayments on or before this due date, you will not be liable to pay any purchase APR.

There are certain other charges as well. For instance, on every cash withdrawal with a Credit Card, a transaction fee is levied. This, too, is added to the statement. Other charges may include, annual fee, renewal fee, cash advance charge, etc.

How Is Interest on Credit Card Calculated?

Before understanding how the interest on the card is calculated, you must be aware of a few details with respect to the transactions and the outstanding balance:

If any amount from the outstanding balance of the previous month is carried forward to the next month, then the interest rate is calculated using a daily balance method that will be applicable to the fresh billing as well as the balance that has been carried forward.

For all cash withdrawals made using the HDFC credit card, the Daily balance method is used to calculate the interest. This interest rate is charged from the time that the transaction has been made until the time it is repaid fully.

For customers who choose a revolving credit facility, they choose to repay an amount that is lower than the amount due. Then the finance charges are applicable on the entire amount that is due, and the interest is applicable on all the new transactions until the outstanding amount is cleared fully.

The daily balance method uses a formula to calculate the interest on the amount that is due. The formula is:

(Total Outstanding Amount X (interest rate charged by the bank) x 12 months) x number of days of outstanding/ 365

Based on these calculations, the interest is applicable. However, each bank offers a grace period. This is an interest-free period. If the individual makes the payment on the Card during this period, there will be no interest charged on the outstanding amount.

Implications of Late Repayment

When it comes to Credit Cards, it is always advisable to use these cards with great caution. While it can be an amazing financial tool during an emergency, overuse and delayed repayments can have very serious financial repercussions, often leaving the customer with huge credit card debts.

The implications of making late repayments on credit cards are discussed below:

The interest on the outstanding amount is calculated for each day of delay. Since the credit card interest rates are usually on the higher side, this can cause the outstanding amount to pile up massively. When customers choose to pay interest by delaying the payment of credit bill, they are indeed paying a much higher price.

Credit scores get affected massively with Credit Card repayment delays. Credit Cards account for 30% of the credit report of the individual. As a result, the score deteriorates faster with any other kind of failure in repaying the credit bill. This will hurt the creditworthiness of the individual, making her ineligible for any loan or card in the near future.

How to Avoid Credit Card Interest?

It is possible to avoid the interest on the Credit Card usage and invariably reduce the interest that one is paying on the outstanding amount. Here are some simple tips:

Make sure that the outstanding amount is repaid fully before the due date. This ensures that there is no interest charged. It is a good idea to set some money aside each month before the statement arrives to prevent delays in charges.

Customers can opt for a balance transfer option to a new Credit Card that offers a lower rate of interest. This helps transfer any outstanding balance and makes the interest payment more affordable for the customer.

In case of a delay in the payment of the outstanding amount, avoid further usage of the card to avoid piling up more dues.

Convert large purchases into affordable EMIs. This will make it easier to repay the credit card bill without any hassle. The interest on Card EMIs is also lower than the rate of interest.