There are two sides to credit card usage – one is to pay for your regular expenses that you can fully pay off each month, the other is to help you pay for an immediate expense need or emergency that you can pay off later at your comfort. It is like a loan with no long-term commitment but which incurs interest.
If you choose the latter, that is, do not make full payment and instead, pay a small amount and carry the rest of the payment to the next cycle, you will have to pay interest on your purchases. Let’s take a look at how Credit Card interest works.
The credit card company gives a person a pre-approved amount of credit. There is a grace period for the person where he or she can buy something on a particular date and pay for it later by the payment due date – which can be anything from 20 to 50 days. If at the end of the grace period, the person pays the entire bill in full on or before the due date, there are no additional charges. But if for some reason, the person pays an amount that is less than the total amount due, then interest is charged. Normally a Credit Card company charges a customer interest at the rate of 3 or 4% per month on purchases that are not paid for in full, every payment cycle.
If the bill is not paid for in full, the interest is calculated from the date of the purchase. So the number of days since the transaction (A) multiplied by the transaction amount (B) multiplied by the Interest rate per month (C) multiplied by 12 months, divided by 365.
A X B X C X 12/365
So it is very important to exercise caution and not spend unless necessary or beyond what a person can actually afford.
Here are some important pointers –
- Making only the minimum payment every month would result in the repayment stretching over years with consequent interest payment on your outstanding balance.
- Remember that if you pay the total amount that is due, by the payment due date, then there is no interest that will be charged.
- If you pay a partial amount before the date when payment is due, then you need to pay interest on the whole amount until the date of payment and then the interest on the amount after the payment is deducted from the total amount due.
- If you have not paid the whole amount that needs to be paid, and then make fresh transactions, then the fresh transactions will attract interest. This is because the interest-free period stands withdrawn on the non-payment of the entire credit card dues. It will essentially mean that all fresh credit card transactions will start to attract interest until you make a full payment of the entire amount billed.
- If a full payment is not made before the payment due date, then interest is calculated on a daily basis on the amount.
- Cash withdrawal on credit card will lead to additional charges like; withdrawing cash attracts a cash advance fee and interest on all your cash transactions, even if you pay the entire amount off before the payment due date.
- You can also convert large purchases into convenient EMIs (equated Monthly instalments).
- You can avail the revolving credit line facility in the case of an emergency to manage your finances better. It works like a short-term loan and therefore accrues interest.
As we always say, it is wise to use your Credit card prudently – and pay off any expenses in one shot.
