How is Interest on a Credit Card Due Calculated

Although India is a savings-based economy, credit cards have made inroads into the financial markets and are here to stay. A report by Economic Times stated that the number of credit card users in India were at 47 million. It is projected to increase at a compound annual growth rate of 25% through the period of 2020 to 2025.

Credit cards are also known as revolving credit. It means that once a credit limit has been assigned to you, your purchases and payments are debited and credited to the card respectively. The main advantage of online credit cards is that the funds are not immediately deducted from your account. You can enjoy the product and service and worry about paying for it at a later date. Thus, credit cards come with an inbuilt grace period.

However, if you do exceed the grace period while making the payment, the interest quotient on the credit card may apply.

Let us understand how the interest is computed on the card.

  • Scenario 1 – Full payment made before the due date
  • If you make the full payment before the due date of the credit card bill, no interest will be charged to the card. It is an ideal situation.
  • Scenario 2 – Full payment made after the due date
  • If you did not make any payment towards your card and have exceeded the due date, you will be charged interest on the full amount outstanding on the card. The interest will be charged from the date on which the transaction was made until the date on which you make the payment. As you did not make any payment on the card, you might also be levied with a late payment fee additionally.
  • It would be an expensive proposition as the entire amount outstanding will be subject to interest and taxes.
  • Scenario 3 – Minimum amount paid before the due date
  • The general misconception is that if you pay the minimum amount, interest will not be charged. It is not correct. A minimum amount of payment only guarantees that there will not be any late payment fees additionally charged to the card. The outstanding amount is still subject to interest and will be calculated accordingly for the number of days the amount remains unpaid.
  • Scenario 4 – Lower than the minimum amount paid before the due date
  • In this case, the outstanding amount will be charged to interest for the days that the amount remains unpaid. Additionally, a late payment fee will be charged, as the minimum amount was also not paid on the card. Taxes will also be charged as per the prevailing regulations.
  • Point to remember – Cash Withdrawal against the credit card

    • If you happen to be in urgent need of cash, the credit card provides you the facility to withdraw cash against your available credit limit. However, the amount that you withdraw is also chargeable to interest. As this is the amount that the company has advanced to you and not cash in your account, it is subject to an interest charge. The interest is calculated from the time of your withdrawal until you repay the amount against the card. Additional taxes would also be levied.

In conclusion, credit cards in India are user friendly, simple, and convenient. In this era of digitization and the internet, you can even apply online for a credit card as well. Credit cards always have your back if you are facing temporary financial difficulties or a cash crunch. Though credit cards have many advantages such as an inbuilt grace period, convenience, and safety, however, in case of delayed payment, they will charge you with interest as stipulated above.