How Credit Card Due Interest is Calculated?

If you use credit cards in India in 2020, then let me ask you a few things.

Have you ever thought about how is credit card bill calculated?

Do you know how interest is calculated on credit card outstanding dues? Or more simply, do you know how to calculate credit card interest?

If you don’t, then you should make the effort of understanding the basics of credit card interest calculation because it will help you manage your credit cards better then. In India, credit cards are growing in popularity. So as more and more Indians start using credit cards in 2021, it makes sense to understand how this tool works.

Related reading: How to choose the Best Credit Card in India?

I have written in detail about why you should pay your credit card’s full amount due and not just the minimum amount due (read more about Credit Card Minimum Amount Due).

Credit cards give interest-free period to all cardholders. The period of interest-free credit varies on the basis of date of the transaction and due date.

Suppose you have a credit card where:

• Bill is generated on the 18^th of every month.
• Payment has to be made by 8^th of the month
• Interest at 3% per month

If you make a transaction on (let’s say) 19^th February 2020, then it will reflect on the bill generated on 18^th March 2020. And you will have to pay for it by 8^th April. So you get interest-free period between 19^th February and 8^th April of about 50 days to clear your dues.

But the number of interest-free days will vary for each transaction.

So let’s say if you make another transaction using the same card on 12^th March 2020 (just before the bill generation date), it will reflect in the bill generated on 18^th March. And you will have to pay for it by 8^th April. So in this transaction’s case, you get interest-free period only for the days between 12th March and 8th April, which is of about 27 days to clear your dues.

So in effect, credit cards offer a revolving credit facility, where cardholders get free credit period for about 20 to 50 days, based on the date of the transaction and the bill due date. But if you don’t pay the credit card bill in full and instead only pay the minimum amount due, then a very high rate of interest of 3% to 4% per month (or 30-40% per annum) is levied on the entire credit card outstanding amount. And the above-discussed interest-free period stands withdrawn for future transactions in case the full dues are not paid.

Now let’s take a simple example to show how interest on credit card dues is calculated.

Credit Card Interest Calculation (Scenario Analysis)

Let’s take the following scenario:

• Date of Transaction using Credit Card: Jan 1, 2020
• Amount: Rs 20,000
• Credit Card Bill Generation (Statement) Date: Jan 6, 2020
• Total Amount Due: 20,000
• Minimum Amount Due (~5%): Rs 1000 (5% of Rs 20,000)
• Due Date: Jan 26, 2020
• Interest on outstanding amount – 3% per month
• Late payment charges – Rs 500

Now there can be 4 scenarios for repayment of credit card dues:

• Repay full outstanding amount before the due date
• Repay partially (but above the minimum due) before the due date
• Repay partially after the due date
• Repay partially after the due date + make new transactions before next bill

Let’s analyse each of these scenarios.

1) Repay Full Credit Card Dues before Due Date

• Total Outstanding Amount (in bill) – Rs 20,000
• Due Date – Jan 26, 2020
• Payment Made: Rs 20,000
• Payment Date: Jan 21, 2020
• Outstanding Amount after Payment: Nil

In this case, no interest will be levied as the dues have been cleared in full before the due date.

Total Interest = Nil

2) Partial Repayment (More than Minimum Due) BEFORE Due Date

• Total Outstanding Amount (in bill) – Rs 20,000
• Due Date – Jan 26, 2020
• Payment Made – Rs 7500
• Payment Date – Jan 21, 2020
• Outstanding Amount after Payment – Rs 12,500
• Next Bill date – Feb 6, 2020
• No transaction is done between Jan 6 to Feb 6

Interest, in this case, is calculated in 2 parts. Levied on the full amount of Rs 20,000 till the first payment, i.e. for 21 days between Jan 2 and Jan 21. The interest on balance amount (Rs 12,500) levied for the next 15 days till new statement is generated, i.e. Jan 22 and Feb 6. Here is the maths:

• Interest levied for 21 days (Between Jan 1 and Jan 21): Rs 414.2 (calculated as 21 x 20000 x 3.0% x 12/365 = 414.2)
• Interest levied for 15 days (Between Jan 22 and Feb 6, on balance of 12,500, i.e. Rs 20,000 Bill – Rs 7500 repayment): Rs 184.9 (calculated as 15 x 12500 x 3.0% x 12/365 = 184.9)

Total Interest = Rs 414.2 + Rs 184.9 = Rs 599.1

3) Partial Repayment (More than Minimum Due) AFTER Due Date

• Total Outstanding Amount (in bill) – Rs 20,000
• Due Date – Jan 26, 2020
• Payment Made – Rs 7500
• Payment Date – Jan 28, 2020
• Outstanding Amount after Payment – Rs 12,500
• Next Bill date – Feb 6, 2020
• No transaction is done between Jan 6 to Feb 6

Interest, in this case, is calculated in 2 parts. Levied on the full amount of Rs 20,000 till the first payment, i.e. for 28 days between Jan 1 and Jan 28. The interest on balance amount (Rs 12,500) levied for the next 9 days till new statement is generated, i.e. Jan 28 and Feb 6. Also, the late payment charges will be applicable as the Minimum Due Amount’ was not paid on or before the Due Date. Here is the maths:

• Interest levied for 28 days (Between Jan 1 and Jan 28): Rs 552.3 (calculated as 28 x 20000 x 3.0% x 12/365 = 552.3)
• Interest levied for 9 days (Between Jan 28 and Feb 6, on balance of 12,500, i.e. Rs 20,000 Bill – Rs 7500 repayment): Rs 110.9 (calculated as 9 x 12500 x 3.0% x 12/365 = 110.9)

Total Interest = Rs 552.3 + Rs 110.9 = Rs 663.2

Late Payment Charges = Rs 500 (as payment made after due date)

Total Charges = Rs 663.2 + Rs 500 = Rs 1163.2

4) Partial Repayment AFTER Due Date & Subsequent Transactions made before next Bill Date

• Total Outstanding Amount (in bill) – Rs 20,000
• Due Date – Jan 26, 2020
• Payment Made – Rs 7500
• Payment Date – Jan 28, 2020
• Outstanding Amount after Payment – Rs 12,500
• Next Bill date – Feb 6, 2020
• One (1) transaction done between Jan 6 to Feb 6
• New Transaction Date: Jan 15
• New Transaction Amount: Rs 15,000

Interest, in this case, is calculated in 3 parts. Levied on the full amount of Rs 20,000 till the first payment, i.e. for 15 days between Jan 1 and Jan 15. Then the interest will be charged on total outstanding (value of subsequent transaction + ‘Total Amount Due’ of the last statement = Rs 35,000) till the date of first payment. Interest on balance amount (Rs 27,500) will be levied for the balance number of days till the generation of next statement. Also, the late payment charges will be applicable as the Minimum Due Amount’ was not paid on or before the Due Date. Here is the maths:

• Interest levied for 15 days (Between Jan 1 and Jan 15): Rs 295.9 (calculated as 15 x 20000 x 3.0% x 12/365 = 295.9)
• Interest levied for 13 days (Between Jan 16 and Jan 28, on balance of 35,000, i.e. Rs 20,000 from previous bill + Rs 15,000 new transaction): Rs 448.8 (calculated as 13 x 35000 x 3.0% x 12/365 = 448.8)
• Interest levied for 9 days (Between Jan 28 and Feb 6, on balance of 27,500, i.e. Rs 20,000 from previous bill + Rs 15,000 new transaction – Rs 7500 payment made): Rs 244.1 (calculated as 9 x 27500 x 3.0% x 12/365 = 244.1)

Total Interest = Rs 295.9 + Rs 448.8 + Rs 244.1 = Rs 988.9

Late Payment Charges = Rs 500 (as payment made after due date)

Total Charges = Rs 988.9 + Rs 500 = Rs 1488.9

Note: The above figures are approximate calculation to show how the interest is calculated on credit card dues.

That is how interest on credit cards is calculated. And hopefully, you would now have a better idea of how to calculate credit card interest or even how much is credit card interest in your credit card bills.

But I want to highlight something before I move on to other things.

Credit card companies give you the option of not paying the full due amount and instead, pay the Minimum Amount Due (generally 5% of total outstanding). This facility is known as the revolving credit facility of the credit cards. But this option doesn’t come free. It comes at a cost. The interest is levied (generally 2-4% per month) on the entire outstanding amount until you make full payment of your credit card outstanding bills.

On a more technical note, the credit card issuers apply Annual Percentage Rate (APR) on the outstanding balance on your credit cards. But when the interest is to be calculated, it based on the Monthly Percentage Rate (MPR) and it is levied on outstanding dues. And different card issuers charge different interest rates depending on various factors.

And for those who are still confused about ‘Will interest be applied if I pay the minimum amount due every month?’ The answer is Yes. The interest will be applied to even if you pay your minimum amount due or even more (but anything less than the total amount due).

But all said and done, its best to simply clear off the total amount due every time. If you can’t do that, it also indicates that you are spending more than what you can pay. So it is an indication for you to stop spending unnecessarily more than what you can pay for in a month or so. You may also want to read why people wrongly blame credit cards for their financial troubles when they themselves are to be blamed: Credit Cards Aren’t Evil.

But if you want, then many card issuers offer cardholders to repay their card outstanding in equal instalments over a period of time. The interest rate applied on EMI systems based on much lower personal loan rates.

I would also suggest that if you are unable to pay your credit card dues in full, then you should avoid making fresh transactions. Why? Because when you are unable to pay the card dues in full, the interest-free credit period is withdrawn immediately after the due date. And all the fresh card transactions attract interest charges from the very next day itself till you make the payment of the entire credit card dues.

So that’s it.

Hope you found this detailed analysis of how to calculate interest on credit card balance in 2020. Once you understand how credit card interest calculations work and how to calculate credit card interest, you will have a very clear understanding about why paying the credit card dues in full makes sense.