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How interest on credit card due is calculated

Synopsis

The interest-free period stands withdrawn on the non-payment of the entire credit card dues.

When you receive the credit card bill/statement, you are should pay the complete bill amount by the end of credit free period to avoid paying interest charges on the outstanding amount. To pay the credit card bill, you generally get a credit-free period of 20 days from the bill/statement issue date.

If you pay only the monthly 'minimum due amount', which is generally about 5 percent of the total amount of the bill, to the lender/issuer, you can repay the outstanding amount over a period of time. This process is commonly known as revolving credit facility. But this deferred payment facility comes at a cost, as interest is levied (at a certain percentage) on the entire outstanding amount until you make the complete payment of your credit card bill.

Satyam Kumar, CEO and Co-Founder, LoanTap said that credit cards offer a pre-approved credit facility. It is a revolving credit, wherein there is a grace period or free credit period on the utilised amount (the credit purchase made through credit card) for 20-50 days, based upon the type of the credit card. Post which, if the outstanding amount is not paid in full or is completed by paying the 'Minimum Due Amount' then interest at the rate of 3-4 percent per month is levied on the entire outstanding amount. "Hence, with revolving credit facility, you can pay the outstanding amount along with the interest levied on it on any later date," he said.

General formula to calculate interest on credit card: (Number of days are counted from the date of transaction made x Entire outstanding amount x Interest rate per month x 12 month)/365.

Bikram Yadav, Head - Credit Cards, RBL Bank explains, how the interest is calculated in the following four scenarios:

Let's first take a basic illustration of a credit card statement:
• Transaction date: July 1, 2019
• Transaction Amount: Rs 10,000
• Statement Date: July 6, 2019
• Minimum Amount Due (normally 5 percent of retail purchases + other fee charges): Rs 500 (5 percent of 10,000)
• Total Amount Due: 10,000
• Amount Due Date: July 26, 2019
• Assumed a monthly interest rate of 3.5 percent on unpaid credit card bill

ACTUAL BILL PAYMENT
Scenario 1: Pay full bill amount before the due date
• Bill amount fully paid on: July 21
• Total payment made: Rs 10,000

Calculation:
Interest levied for 21 days (Between July 1 and July 21): 241.56 [21*10000*3.5%*12/365 = 241.56]
Total interest charged = 0

Remarks:
"Interest will not be levied since payment has happened before due date and system will net off the interest charged, and you will not be pay additional interest charges for it," said Yadav

Scenario 2: Partial payment before the due date
• Total payment made: Rs 5,000
• Payment date: July 21
• Next statement date: August 6
• Transaction done between July 6 to August 6: NIL

Calculation:
Interest levied for 21 days (Between July 1 and July 21): 241.56 [21*10000*3.5%*12/365 = 241.56]
Interest levied for 15 days (Between July 22 and August 6, on balance of 5000 [10000 (Bill amount) - 5000 (payment made)]): 86.4 [15*5000*3.5%*12/365 = 86.4]
Total interest charged = 86.4 + 241.56 = 328

Remarks:
Interest will be levied for the complete amount of Rs 10,000 till the first payment. Interest on balance amount (Rs 5,000) will be levied for the next 15 days till new statement is generated.

Scenario 3: Partial payment after the due date
• Total payment made: Rs 5,000
• Payment date: July 28
• Next statement date: August 6
• Transaction done between July 6 to August 6: NIL

Calculation:

Interest levied for 28 days (Between July 1 and July 28) = 322.2 [28*10000*3.5%*12/365 = 322.2]
Interest levied for 9 days (Between July 28 and August 6 on balance of 5000 [10000 (bill amount) - 5000 (payment made)]) = 51.8 [9*5000*3.5%*12/365 = 51.8]
Total interest charged = 51.8+322.2 = 374

Remarks:
Interest will be levied for the complete amount of Rs 10,000 till the first payment. Interest on balance amount (Rs 5000) will be levied for the next 9 days till new statement is generated. In addition to above, "A late payment charges will also be applied as 'Minimum Due Amount' was not paid on or before the 'Due Amount Due Date'," said Yadav.

Scenario 4: Partial payment after the due date and subsequent transactions made
• Total payment made: Rs 5,000
• Payment date: July 28
• Next statement date: 6 August
• Transaction done between 6 July to 6 August: 1
• New transaction amount: Rs 1000
• New transaction date: July 15

Calculation:
Interest levied for 15 days (Between July 1 and July 15) = 172.6 [15*10000*3.5%*12/365 = 172.6]
Interest levied for 13 days (Between July 16 and July 28 on balance of 11000 [10000 (outstanding (bill amount) from previous statement) + 1000 [new transaction]) = 164.5 [13*11000*3.5%*12/365 =164.5]
Interest levied for 9 days (Between July 28 and August 6 on balance of 6000 [11000 (outstanding) - 5000 (payment made)]) = 62.13 [9*6000*3.5%*12/365 = 62.13]

Remarks:
Interest will be levied for the complete amount of Rs 10,000 till the date of the first transaction. Then the interest will be charged on total outstanding (value of subsequent transaction + 'Total Amount Due' of the last statement) till the date of first payment. Interest on balance amount (Rs 6,000) will be levied for the balance number of days till the generation of next statement. Additionally, applicable late payment charges will also be applied.

Points to remember
1. If you pay back the 'Total Amount Due' by the due date, then interest which is leviable till the due date will get reversed and no interest will be levied. If you do not pay back the 'Total Amount Due' by the due date and only pay a partial amount, you will be liable to pay the total interest chargeable till the due date.

2. Sahil Arora - Director & Group Head, Paisabazaar.com said you should avoid fresh card transactions if you have not paid credit card dues. As the interest-free period stands withdrawn on the non-payment of the entire credit card dues, even fresh card transactions start attracting interest charges till you make the payment of the entire credit card dues.

3. Yadav said, "If payment by the due date is not made, interest will be calculated on a daily basis and GST at 18 percent is additionally charged on the interest amount as per the Government norms."

4. You should avoid using your credit card for ATM withdrawals as far as possible as lenders charge a cash advance fee of up to 3.5 percent on the amount withdrawn. Additionally, credit card ATM withdrawals also attract interest charges right from the day of the transaction till the date of its repayment. You do not get any credit-free period to make interest free re-payments of the same.

5. If you don't even make 'Minimum Payment Due' by due date (as mentioned in the statement), then you also have to pay an additional late payment charges as a penalty. Arora said, " Non-payment of the minimum amount due on time would additionally cost you late payment fee of upto Rs 1,000 or it can be a percentage of 'Total Amount Due', as per the credit card norms."

What to do if you are unable to make payments before due date?
If you have failed to repay your credit card bill by the due date, it is best to avoid further use of your credit card if you do not want to increase your interest payments since you have run out of interest-free days (credit-free period). Hence, if you find repayment difficult, you can convert big-ticket transactions into EMIs (equated monthly instalements) for ease of repayment.

Experts suggest if you are not able to repay the entire outstanding at one go, or not even able to convert transactions into EMIs, then you can also take a personal loan from any lender and pay the entire credit card outstanding amount in one go.

Kumar said, "The interest rate on a personal loan, which ranges from 1.2 to 2.5 percent per month, is slightly less than the interest rate levied on a credit card which ranges from 3 to 4 percent per month." This way financial indebtedness can be reduced to a certain extent.

Disclaimer: The actual interest calculation will vary based on your purchase, revolve behaviour and the interest rate applicable on your credit card. Also, making only the minimum due/partial payment every month would only increase your repayment time period over years with consequent interest payment getting added on the outstanding balance.