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How credit card interest is calculated: 7 things to know

  • Highlights

  • Monthly dues incur an MPR and vary as per transaction date

  • Paying bills within the grace period nullifies interest dues

  • You can reduce yearly interest with a good credit score

  • SuperCards reduce interest by giving interest-free features

Owning a credit card gives umpteen financial benefits. You get discounted air travel, reward points on every purchase and even have the flexibility to withdraw cash or take a small personal loan to deal with a financial crunch quickly. While you may worry about interest expenses, you can easily avoid interest build-up or accumulating debt by making timely payments. Further, understanding the various offers and the expenses you incur can help you be financially prudent too.

To help you understand your expenses, here are 7 things to know about how your credit card interest is calculated.

Transactions incur a monthly percentage rate (MPR)

Each time you use your credit card to pay a bill or shop online or offline, a transaction is recorded against your name. When calculating your monthly dues, issuers apply a monthly percentage rate to the transactions of the month. MPR differs from APR which gives you the rate of interest applicable for the entire year. So, if the APR for you purchase balance carried through the year is 36% then your MPR is 3%.

The date of the transaction impacts the interest accumulated

The amount of interest each transaction incurs varies with the date of making the purchase. Say that you make two purchases, one on 5 January 2019 and the other on 9 January 2019. Assume that your billing cycle is set to the 20th of each month and you have a 14-day interest-free period. Also, consider that you fail to pay your dues in the interest-free period, and make your payment on 10 February 2019. Now, the transaction made on the 5th of January will incur interest for 36 days (26+10) and the purchase made on the 9th will incur interest for 31 days (21+10).

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Interest charges apply only after the grace period

While transactions for the month incur a monthly percentage rate, most issuers will allow you to avoid these charges provided that you pay your credit card bill in full within the interest-free or grace period. In the above example, you had a 14-day grace period. So, if you paid your bill before 3 February 2019, then you would not incur interest on any of your purchases.

Not paying your bill in full results in piled up interest debt

Another disadvantage of not paying your credit card bill in full is that interest can begin to pile up on interest. This is the case even when you make just the required minimum bill payment. Any remaining or unpaid outstanding amount incurs interest. If this is not cleared in full in the subsequent billing cycle, then interest will itself incur more interest leaving you with an impending debt trap.

Paying your credit card bill on time is so important that issuers like Bajaj Finserv even allow you to pay more affordably by splitting up your bill into smaller EMIs. To do this all you need to do is call the credit card customer care number 022 – 71190900 and ask for the bill to be converted to EMIs.

The total cost of borrowing is reflected by the annual percentage rate (APR)

When comparing credit card interest rates, you may frequently come across a term called APR. It stands for Annual or Annualised Percentage Rate. Issuers tend to display this rate because it gives you a truer cost of borrowing. APR includes charges like cash advance, balance transfer and penalty fees that will not be indicated by the MPR.

Additional Read: How to check credit card balance

You can reduce your APR by having a good credit score

While issuers may list a particular APR on their website, the APR obtained is not flat across-the-board for all users. Typically, the higher your credit score is, the lower the APR you can get. This is because handsome credit scores indicate impeccable repayment history and reassures the issuer of timely credit card bill payments. Since less risks are involved, the issuer will be happy to lower the APR for you.

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You can reduce your APR by choosing your issuer wisely

Before you settle on a particular credit card, it’s important that you look beyond the stellar features and into the fine print. This can help you secure a lower APR. For instance, while most issuers will charge you interest for withdrawing cash with your credit card, issuers like Bajaj Finserv do not. You can make 50-day interest-free cash withdrawals with any Bajaj Finserv RBL Bank SuperCard. Additionally, this card allows you to convert your cash limit into a 90-day interest-free personal loan and pay for purchases over Rs.3,000 in smaller EMIs.

This 4-in-1 credit card also makes spending easier as you can enjoy numerous attractive credit card offers and make annual savings as high as Rs.55,000 as well. To get this powerful card on simple eligibility terms, check your pre-approved credit card offer from Bajaj Finserv. A quick verification step will give you instant approval and a chance to apply via a customised deal and win up to 20,000 reward points as a welcome gift.

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