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When Does Interest Start Accruing on Credit Cards After the Due Date?

The push for Digital India and the social distancing norms of Covid-19 encourage the least possible human contact at POS. People use various alternate payment methods in exchange for cash at various places like petrol pumps, hospitals, medical stores, grocery stores, etc. 

Additionally, as most people got confined to home due to the multiple lockdowns, people started depending more on shopping from online shopping platforms.

The credit card interest rate is not a concern for these shoppers if they get into the habit of paying their credit card bills on time. 

Most people were working on the work from home (WFH) structure during the lockdowns and comprised 19% of the global consumers in the last quarter of 2021. Various companies like Facebook, Tata Steel, Twitter, and Spotify have permanently shifted to a permanent WFH or Hybrid WFH culture. 

All these events have led to a significant rise in the use of digital payment methods, and credit cards are the most commonly used of these.  

It makes it imperative to understand the credit card interest rate in detail to avoid unnecessary charges on your credit card. 

What is a Credit Card Interest Rate?

A credit card interest rate is the amount of money a cardholder pays for borrowing money. The card issuer charges it as a percentage of the balance amount. The interest rate, called the Annual Percentage Rate (APR), is stated as a yearly rate but in most cases, it compounds daily. 

When does Interest Start Accruing on Credit Cards After the Due Date? 

The interest rate applies when the cardholder pays only the minimum balance or does not pay the monthly bill at all. If the cardholder does not pay on time, the interest rate comes into effect that adds to the balance, which gets rolled over to the coming month. 

Credit cardholders are given a credit-free period, usually 20 days, that starts at the credit card statement issue date. 

If the cardholder pays only the minimum balance (approximately 5% of the bill amount), he can pay the remaining amount over time. This deferred payment facility is known as the revolving credit facility and leads to interest on the complete outstanding amount. 

How to Calculate Credit Card Interest 

The card issuer charges a daily interest on the credit card balance. The balance amount multiplied by the daily interest rate gives the total due amount on a credit card balance. 

To get the daily interest rate, divide the APR by 365. 

Let’s take an example of a credit card having a balance of Rs. 500 on it, with an APR of 16%. The daily interest rate here will be 365/16, which is 0.044%.

On day 1, the interest on the balance of Rs. 500 will be Rs. 0.22. The balance for day two will be Rs.500.22. 

The calculation continues in this way for the whole month, and at the end of the month, the new balance for the cardholder will be Rs. 506.60, including the interest applicable.

When Does a Credit Card Issuer not Charge Interest?

A card issuer does not charge any interest if the cardholder had paid the last credit card billing statement in full. In such a case, the cardholder starts with zero balance due on the card, and there will be no interest charged in this case. 

Sometimes, card issuers offer a grace period to the cardholders to pay back the due balance. The grace period starts on the last day of the billing cycle and extends for about 25 days. 

If the cardholder pays the complete balance amount before the end of the grace period, he will not have to pay any interest to the card issuer. 

However, if you withdraw cash using your credit card, the grace period does not apply to such cash advances. 

Factors that Determine Credit Card Interest Rates

  • Credit history of the cardholder: The card issuer considers the credit history and credit score of the cardholder before deciding the interest rate. If your credit score is healthy and you have a decent repayment history, the interest rates will be lower for you.
  • Prevailing interest rate: The prevailing interest rate or the prime rate decides the starting point for the interest rate on a credit card. The prime rate is even more significant for credit cards with a variable APR.
  • Fixed and Variable interest rates: There can be different APRs on a credit card for various functions like purchases, cash advances, and balance transfers. The APRs can be either fixed or variable.
  • Promotional offers by the card issuer: Banks may offer a 0% interest period on credit card purchases. A credit card balance check is necessary because the interest rates increase once the promotional period ends.

The Bottom Line

A cardholder can reduce the interest rate on his balance payment. Pay the entire credit card bill on time to avoid interest charges and in any case, pay more than the minimum payment required. You can also consider paying more than once a month to lower the daily balance. Lastly, a good credit score also helps keep the interest loan on your credit card. 

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