Credit Card Interest Rates

How are Credit Card Interest Rates Calculated?

Credit card interest rate is calculated as the Annual Percentage Rate (APR) of the charge. It is the interest rate for the whole year rather than a monthly rate. However, while calculating the interest rate for monthly dues, the monthly percentage rate (MPR) will be applied to the transactions. The APR and MPR vary from one bank to another and one card to another. While applying for a credit card, it’s important to know how much APR is being charged on a particular card.

Understanding how interest is charged on your credit card is important to manage your finances effectively. Here's an illustration to explain how your card issuer calculates interest:

• Full payment by the due date (26 May 2025): No interest charges are applicable.
• Partial payment before the due date (26 May 2025): Partial payment: Rs. 5,000
  • Interest charged on Rs.20,000 for 21 days: [(21 x Rs.20,000 x 3% x 12)] / 365 days = Rs.414.24
  • Interest charged on the Rs.15,000 balance for 15 days: [(15 x Rs.15,000 x 3% x 12)] / 365 days = Rs.221.91
  • Total interest payable: Rs.414.24 + Rs.221.91 = Rs.636.15
• Partial payment after the due date (26 May 2025): Partial payment: Rs.5,000
  • Interest charged on Rs.20,000 for 28 days: [(28 x Rs.20,000 x 3% x 12)] / 365 days = Rs.552.33
  • Interest charged on the Rs.15,000 balance for 9 days: [(9 x Rs.15,000 x 3% x 12)] / 365 days = Rs.133.15
  • Total interest payable: Rs.552.33 + Rs.133.15 = Rs.685.48
• Partial payment after the due date with fresh transactions: Partial payment: Rs.5,000 +Fresh transaction: Rs.2,000
  • Interest charged on the outstanding balance for 15 days: [(15 x Rs.20,000 x 3% x 12)] / 365 days = Rs.295.89
  • Interest charged on new outstanding balance with a fresh transaction for 13 days: [(13 x Rs.22,000 x 3% x 12)] / 365 days = Rs.282.08
  • Interest charged on balance after partial payment for 9 days: [(9 x Rs.17,000 x 3% x 12)] / 365 days = Rs.150.90
  • Total interest payable: Rs.295.89 + Rs.282.08 + Rs.150.90 = Rs.728.87

Note: This is an illustrative example. The interest rate on a credit card can vary from bank to bank. To know more about the interest rate on your credit card, contact your bank.

When is Interest Charged on Credit Cards?

As mentioned earlier, if you pay the total amount due (TAD) on your credit card before the due date, the interest charges will not be applied. Let’s see the cases when the finance charges are applicable on credit card transactions.

Case: 1 - When you make no credit card payment: When you entirely skip your credit card payment in a month, the bank will start charging interest on the total amount due as well as on all the new transactions from the date of transaction till the time all the previous dues are paid in full.

Example:

Note: Interest rates vary from bank to bank. This is an illustrative example with the interest rate taken at 3.00% MPR and calculated by the formula: (Number of days counted from the date of transaction x Outstanding Amount x Interest rate per month x 12 months)/365.  

Case: 2 – When you pay only the minimum amount due: If you pay only the minimum amount due on your credit card, interest will be charged on the remaining amount and on all the new transactions till the previous balance is paid in full.

Case: 3 – When you pay less than MAD: If you wish to pay an amount that is less than your minimum amount due on your credit card, the entire outstanding amount will attract finance charges along with all the new transactions, till the previous outstanding amount is cleared in full.

Case: 4 – When you withdraw cash: If you withdraw cash using your credit card, you are availing the cash advance facility, hence, the withdrawn amount will attract finance charges from the date of withdrawal till the amount is paid back in full.

Case: 5 – When you carry forward outstanding: If you haven’t cleared your previous month’s outstanding in full, the bank will carry forward the remaining amount to the next billing cycle. In such cases, based on the repayment amount, either MAD or less than MAD, the interest rate will be charged on the outstanding as well as on all the new transactions, till the previous dues are cleared completely.

Credit Card Interest-free Period

Credit card interest-free period or grace period is the time between the credit card transaction date and the credit card payment due date. It varies for every transaction made on your credit card. The interest-free period ranges from 20 to 50 days. If you make the payment within the interest-free period, i.e., on or before the due date, you don’t have to pay any interest.

Example:

1. A credit card has an interest free period of up to 50 days. The billing date on the credit card, for instance, is the 5th of every month.
2. This means you can spend on this credit card from 6th May to 5th June and he will be billed on the 5th June. His payment due date, considering the 50-day interest-free period, will be 24th June.
3. If you calculate from 6th May to 24th June, you will get a period of 50 days, which is nothing but the interest-free period.
4. This means only the transactions done on the first day of the billing cycle, which is 6th May, will have an interest-free period of 50 days. For all subsequent transactions, the grace period will get reduced based on the transaction date. A transaction done on the 1st of June will have a grace period of only 24 days.
5. The minimum grace period, in this case, is 20 days applicable for a transaction done on 5th June. Thus, grace period or interest-free period varies from one transaction to another.
6. The interest-free period is not applicable if the previous month's dues are not cleared and carried forward to the current month. Even for cash advances, there is no interest-free period. Finance charges will be levied on the withdrawn amount from the date of withdrawal till the amount is paid back in full.

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