Interest rates in Credit Cards

How do Credit Card Interest Rates Work?

Credit card interest rates are expressed as an annual percentage rate (APR). The APR is the interest rate you’ll pay over the course of a year if you carry a balance on your credit card. For example, if you have a credit card with an APR of 18%, and you carry a balance of Rs.1,000 for a year, you’ll pay Rs.180 in interest charges.

It’s important to note that the APR is not the only factor that determines the cost of carrying a balance. The interest rate is calculated based on the average daily balance of your account. This means that the interest charges you pay will depend on how much you owe and how long you carry the balance.

The interest rate can also be affected by the type of transaction you make. For example, cash advances and balance transfers typically have higher interest rates than purchases. This is because they are riskier for the credit card issuer.

Factors that Affect Credit Card Interest Rates

Credit Score: Your credit score is a measure of your creditworthiness. It’s based on your credit history, including your payment history, credit utilization, and the length of your credit history. The higher your credit score, the lower the interest rate you’re likely to be offered.

Credit History: Your credit history is a record of your past credit behavior. This includes things like your payment history, the number of accounts you have open, and the length of your credit history. A good credit history can help you qualify for a lower interest rate.

Payment History: Your payment history is a record of your past payments. Late or missed payments can negatively impact your credit score and may result in a higher interest rate.

Credit Utilization: Your credit utilization is the percentage of your available credit that you’re currently using. A high credit utilization can negatively impact your credit score and may result in a higher interest rate.

Income: Your income can impact the interest rate you’re offered. A higher income may help you qualify for a lower interest rate.

There are several factors that can impact the interest rate you’re charged on your credit card. These include:

When is Interest rate charged on Credit Cards?

• Whenever you do not make any payment towards the outstanding amount. The bank will be charging interest on the total amount due in addition to charging it on new transactions till the time you settle all the bills
• Whenever you pay only the minimum amount due, then the interest rate will be charged on the remaining amount and also on the further transactions you make, till you settle the bill
• Whenever you pay less than MAD, then the interest rates will be charged on the entire outstanding amount and all the new transactions
• Whenever you take cash advance from ATM, interest rate will be charged along with the processing fee from the date of withdrawal
• Whenever you carry forward the outstanding balance from the previous month, the bank will carry forward the remaining amount to the next billing cycle. In such a case, the interest rate will be charged on the balance amount along with all the new transactions that you make.

What is Interest Free Period?

Interest Free period is the grace period between the transaction date and payment due date. The interest free period varies from bank to bank and it ranges from 20-50 days.

The interest-free period will not be applicable if the previous month’s dues are not settled and are being carried forward.

Conclusion

Credit card interest rates can have a significant impact on the cost of carrying a balance. Understanding how interest rates work and the factors that can impact them is an important step in choosing the right credit card for your needs. By improving your credit score, negotiating with your credit card issuer, transferring your balance, paying more than the minimum, and avoiding cash advances, you can lower your interest rate and save money over time. Remember to always read the fine print and understand the terms and conditions of your credit card agreement to avoid any surprises.