If you are planning to apply for a credit card, there is one question that you should absolutely know the answer to — what is the credit card interest rate?
You may think this is not such an important aspect of owning a credit card. After all, there are many other things that you should know about, like annual fees, the late fees, the credit card rewards and more. However, while these aspects are no doubt vital, but credit card interest is pretty critical too.
When you use your credit card to make a purchase or pay a bill, you essentially taking a loan on the credit facility. You need to pay back this amount within the due date set by the card issuer.
Typically, the due date is set at around 4o to 55 days from the start of the billing cycle. During this window of time, you do not incur any additional charges on the amount spent, which is why it is known as the interest-free period.
Credit cards give you the option to pay just the minimum amount. Don’t be tricked by this. This is the minimum amount that you need to pay, so the bill is marked as ‘paid’. But this is not without consequences. The unpaid amount is carried forward with an added daily interest charge for each day that the rest of the amount is not cleared by you. Pretty crazy right? In most cases, banks are required to be upfront with you about this amount. You will typically see a warning on your credit card statement that tells you explicitly that not paying this amount will accrue interest. So make sure you pay the whole amount on time.
So, if you fail to pay a part or all of the credit card bill within the due date, you start to incur interest charges on the outstanding amount. The rate at which this interest is levied is what we call the credit card interest rate.
Let us look at an example to understand this better.
Say you have a credit card with the following particulars.
So, you will incur interest charges on the outstanding amount, which is ₹30,000. Keep in mind that interest on this outstanding amount will be calculated from the date on which you made the expenditure, i.e. October 7, 2022.
The rate of interest on credit cards in India is not the same for all cards. Depending on the type of credit card you apply for and the terms and conditions set by the credit card issuer, the rate of interest on the outstanding balance can vary from around 2% to 4% per month. This essentially amounts to 24% to 48% per annum, which is incredibly high. In order to avoid incurring such high charges, it is essential to pay your credit card bills on time.
To ensure that you don’t rack up steep interest charges, it is essential to understand how the interest is calculated, in the first place. The following formula is used to compute the interest on the outstanding balance on your credit card.
Interest charges =
(Outstanding amount x Interest rate p.a. X Number of days from the transaction date) ÷ 365
So, let’s take the example we saw earlier. As per the details discussed, an amount of ₹30,000 is outstanding on your credit card from October 7, 2022. Now, if you pay these outstanding dues on December 1, 2022, and if the interest rate on your card is 3% per month (or 36% per annum), you will have to pay the following amount as interest.
= (Outstanding amount x Interest rate p.a. X Number of days from the transaction date) ÷ 365
= (₹30,000 x 36% x 62) ÷ 365
You do not need to pay interest on every transaction you make using your credit card. For instance, if you pay your dues within the due date, you will incur no interest on your spending whatsoever. That said, you will typically have to pay interest in the following scenarios.
Do note that in case you have any amount outstanding on your credit card past the due date, you will incur interest charges on any and all purchases/spends made using the card till you repay the outstanding amount completely.
This sums up everything you need to know about credit card interest rates in India and how this phenomenon works. Because the interest charges on your card can be very steep, it is always advisable to pay your outstanding balance on time and to refrain from using your credit card to withdraw cash.
The monthly credit card interest rate in India varies from one card to another. Typically, it ranges from 2% to 4% per month. Make sure you check the terms and conditions of your credit card to know what the interest rate on it is.
The interest rate on cash withdrawal using credit cards is the same as the finance charges applicable on the outstanding amount on your card. So, this rate also ranges from 2% to 4% per month, depending on the card you have applied for.
The usual credit card interest rate depends on the card you hold and the terms and conditions set by the issuer. It can be as low as 2% per month or as high as 4% per month.