Credit Card Interest Rates: What is it & How it Works

Many Credit Card customers do not understand interest rates. While it may seem complicated, it is not difficult to understand interest rates. 

What is Credit Card Interest Rate

Credit Card interest rate also known as the finance charge is the rate charged by the Credit Card companies on the amount you borrow. The interest rate varies from lender to lender and based on the type of Credit Card you own. Let us understand more about the Credit Card interest rate.

Credit Card Interest Rates 2024

Interest is applied on the outstanding balance of your Credit Card if you do not pay the full amount by the due date. This interest is charged when you only pay the minimum amount due or miss a monthly payment. However, if you pay off your balance in full before the due date, no interest will be charged. It is essential to understand the terms and conditions of your Credit Card and be aware of the applicable interest rates to manage your finances effectively.

For e.g. you have an ICICI Bank Instant Platinum Credit Card with a 30-day billing cycle. On May 1, 2024, you make a purchase of ₹5,000 but you don't pay the entire balance by the due date. Your Credit Card charges will be as below:

How to Lower My Credit Card Interest Rate?

Reducing your Credit Card interest rate can be tricky, especially if it is your first Credit Card or you have a low credit profile. First, research other Credit Card offers to use them as a basis for negotiation with your existing Credit Card provider. Raise your creditworthiness by improving your payment record to get a lower interest rate. You can also consider a balance transfer to a Credit Card, whose primary interest is not too high.

How Is Credit Card Interest Rate Calculated?

The Credit Card interest rate in India is calculated as per the Annual Percentage Rate (APR). It is the interest rate calculated for the whole year rather than the monthly rate. However, while determining the interest for the monthly transactions, the Monthly Percentage Rate (MPR) will be applied. Both the APR and the MPR significantly vary from bank to bank and the type of Credit Card you use. It is important to ask the Credit Card issuer about how much APR will be applicable while applying for a Credit Card.

What Type Of Transactions Attract Interest Charges?

Here are a few cases when the credit card companies charge interest on the credit card transactions:

• When you fail to pay the outstanding dues within the due date
• When you pay only the minimum amount due for the month
• When the amount you repay is less than the minimum amount due
• When you use your Credit Card for cash advance. This essentially means that you use a Credit Card to withdraw money from the ATM
• When you carry forward the due amount from the previous month to the next month
• If you pay the outstanding amount on your Credit Card before the due date, banks will not charge any interest.

Factors That Affect The Credit Card Interest Rate

Your personal credit score is one of the most important factors that the Credit Card companies consider while deciding the Credit Card interest rate. However, there are other factors that affect the interest rate:

Payment history

Your past payment history reflects your ability to repay the dues and your creditworthiness. If the lender sees that you have been disciplined with your payments and have minimum or no outstanding dues, it will not only increase your credit score, but also help you get a Credit Card at a lower interest rate. On the other hand, if you have defaulted on your payments, the credit score will be low and consequently the interest payable on the Credit Card will be higher.

The amount you owe

Credit Card companies while deciding the Credit Card interest, check the sanctioned credit limit and the credit utilised. A lower credit ratio will give an impression that you have been responsible with the payments. But, if the credit ratio is higher, be prepared to attract a higher interest charge on your Credit Card.

Apart from the above factors, the length of the credit history and the type of credit due also affect the interest rate.

When is Interest charged on Credit Cards?

Interest on Credit Cards is typically charged under several circumstances, influencing the overall outstanding amount.

Delayed payment: If you fail to pay the outstanding balance by the due date indicated in your Credit Card statement, the Credit Card company will apply interest on the unpaid amount.

Payment of only minimum amount due: Paying only the minimum amount due instead of paying the full outstanding balance results in the remaining amount accruing interest.

Partial payment: When you pay an amount less than the total outstanding due, the balance becomes subject to interest charges.

Cash advances: Using your Credit Card to withdraw cash from an ATM results in immediate interest charges, often at higher rates than regular transactions.

Carrying forward balances: If you carry forward an unpaid balance from the previous billing cycle, interest will apply to the amount which is carried forward.

It is crucial to note that settling the complete outstanding balance on your Credit Card before the due date avoids interest charges for that billing cycle. Understanding these scenarios will help you manage your Credit Card payments more effectively and minimise interest.

Credit Card Interest-free Period

The Credit Card interest-free period means a specific timeline following the end of a billing cycle during which you are not obligated to pay any interest on purchases made using your Credit Card. It serves as a grace period, allowing you to make purchases without incurring additional charges. However, settling the outstanding within this designated period is essential to avoid interest and impact on your credit score.

How To Use Credit Card Interest Calculator?

As discussed above, there are many factors that affect Credit Card interest and it can be difficult to calculate the interest manually. To ease the calculation process for customers, most banks provide a Credit Card Interest Rate Calculator on their website. Once you enter information in the tabs, the calculator will automatically show interest applicable and the total amount due.

Credit Card Interest Rate FAQs

How is the Credit Card Interest Rate determined?

Credit Card interest rates are determined using certain factors such as your credit history, current market rates and the Credit Card type.

What is the average Credit Card Interest Rate?

The interest rate depends on various factors. Different Credit Cards have different interest rates. It is important to note that the interest rate largely depends on the Card type and your financial behaviour, like making timely bill payments and keeping the credit utilisation ratio to a minimum.

How do I lower my Credit Card Interest Rate?

Here is how you can lower your Credit Card Interest Rate:

• Have a good credit score
• Negotiate with the issuer
• Pay bills on time
• Maintain a low credit utilisation ratio.

Is the Credit Card Interest Rate charged monthly?

The interest rate on your Credit Card is charged monthly when you do not pay your Credit Card bill on time.

How to calculate Monthly Credit Card Interest?

Divide the annual interest rate by 12 to determine the monthly Credit Card interest.

How does the Interest Rate on a Credit Card work?

The interest rate on a Credit Card is the amount charged when you transact and do not pay your complete dues by the due date.

When should I pay my Credit Card bill to avoid interest?

Make full payment before the due date.

Will interest be charged even if I pay the Minimum Amount Due?

Will interest be charged even if I pay the minimum amount due?

Paying only the minimum amount due results in interest charges on the outstanding amount. It is advisable to make full payments to reduce dependency on credit.

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