Credit Card Interest And Other Charges

Every credit card has interest charges, which is the main source of earning from the credit card for the bank/NBFC. 

To put simply, the general formula of interest calculation in a credit card is:

(Number of days from the date the transaction is made X entire outstanding amount X interest rate per month X 12 months)

But there are some concepts to learn. So let’s understand them through an example of a transaction on a credit card:

Transaction date: November 1, 2020
Transaction amount: ₹ 10,000
Statement date: November 10, 2020
Payment due date: November 28, 2020
Total amount due: ₹ 10,000
Minimum amount due: ₹ 500
Monthly interest on unpaid credit card bill: 3.5%

Scenario 1: Let us assume that in the first scenario, the bill is paid in full on the due date: November 28, 2020

No interest will be charged on the card. 

Scenario 2: Let us assume that the credit card holder makes a partial payment of ₹ 5000 on the due date: November 28, 2020

The next statement will be generated on December 10, 2020. For the ease of calculation, let us assume that this transaction of ₹ 10,000 is the only transaction on this credit card and no transaction has been made on the credit card after November 28, 2020. 

The total interest charged in the statement generated on December 10, 2020 will be calculated in 2 parts:

1. Interest levied for 28 days (from November 1 to November 28) on ₹ 10,000 = 28X10,000X3.5X12/365 = ₹ 322.19
2. Interest levied for 12 days (from November 29 and December 10) on ₹ 5,000 = 12X5,000X3.5X12/365 = ₹ 69.04

Thus the total interest charged in statement generated on December 10 = ₹ 322.19 + ₹ 69.04 = ₹ 391.23

Please note that if the payment is made in full, no interest is charged. However, in the case of partial payment (such as ₹ 5,000 in scenario 2), interest will be charged on the full amount until the payment is made and then on the remaining amount after the payment. 

Sometimes, banks/NBFCs may extend the interest free period on certain high value cards, to reward high networth individuals. For example, Citibank offers an interest free period up to 53 days for certain types of cards.

Other charges associated with credit cards

Well, interest is not the only charge that you pay on a credit card, there will be other charges as well. Let’s see some of them:

• Annual fee: Sometimes credit cards may have annual fees which are charged by the financial institution for issuing the card. It is charged only once a year. Of course, free cards are also available, but they may not have good features. Sometimes, no annual fee is charged in the first year, and it is levied only from second year onwards. It is a good idea to check this annual fee while applying for the card. 
• Late payment fee: Every credit card bill will have a date by which the payment has to be made. In case if the payment is missed, the bank/NBFC will charge a late payment fee. Please note that this applies only if the payment is missed completely. In case you have paid at least the minimum balance by the payment due date, late payment fee will not be charged. Missing a payment should be avoided, not only to avert this fee but also to add a black mark in your credit history.  
• Cash advance fee: As mentioned earlier, most credit cards have a cash limit, which you can use to withdraw cash through an ATM. This is known as a cash advance or cash withdrawal. However, banks will charge interest on the cash withdrawn which is known as a cash advance fee. This interest is charged right from the day the advance is taken and hence, it doesn’t involve any interest-free period. Cash advance fee may or may not be the same as the credit limit interest. The rate will vary from bank to bank. Hence, it is a good idea to check the fee before withdrawing cash from the credit card. Please remember, withdrawing cash from credit cards should be done only in times of emergencies. It is not a good idea to make it a habit, since the interest charged is pretty high. 
• Over-limit fee: In case the credit limit in a credit card is exhausted and it is used for an extra amount, banks/NBFCs will charge an over-limit fee. This fee can be different for different banks/NBFCs, however, they generally start from ₹ 500. 
• Foreign currency usage fee: One of the main benefits of credit cards is the ability to use them across the world without having to carry traveller’s cheques or foreign currencies. This feature can be very helpful especially during emergencies. However, this benefit does not come without a fee. Lenders charge a fee for every usage of credit cards abroad. 
• GST: GST is charged on all credit card transactions, interest payment, annual fee and processing fee. At present this is charged at the rate of 18%.