How is compound interest calculated on a credit card balance?

How is compound interest calculated on a credit card balance?

Your credit card may be a handy little tool when it comes to taking care of some of your expenses. However, you must keep in mind that how you pay your credit card bill will directly affect hope much you’ll have to pay. When you get your credit card bill, there is a credit free period of 20-50 days. If you pay your entire outstanding amount within this period, there will be no interest levied on it. If you pay only the minimum amount, which is usually 5 percent of the outstanding amount, then an interest is charged on the remaining amount until you make the complete payment.  

Formula for calculating interest in credit card:

No. of days from the date of transaction x Outstanding amount x Interest Rate per month x 12 month / 365

Let us understand how you can apply this formula to a credit card bill.

Consider the following credit card statement:

-Transaction date: 1st May 2021

-Transaction Amount: Rs. 10,000

-Statement Date: 6th May 2021

-Minimum amount due: Rs 5000 (5% of Rs. 10000)

-Total Amount Due: Rs. 10,000

-Amount Due Date: 26th May, 2021

-Monthly Interest of 3.5% can be assumed on the unpaid credit card bill.

Scenario 1: Full payment before the due date

If you pay your entire outstanding bill amount before the due date in the credit free period. 

-Bill payment date: 21st May, 2021

-Total payment: Rs. 10,000

According to the formula, interest will be:

21*10000*3.5%*12/365 = 241.56

However, the total interest charged to you would be zero since you paid the dues in the credit free period. 

Scenario 2: Partial payment before due date

Payment done: Rs. 5000

Date of payment: 21st May 2021

Next statement date: 6th June, 2021

Calculation of interest will be as follows:

Interest on the entire amount will be calculated for 21 days, that is until the first payment was made. Interest on the balance amount will be calculated for the next 15 days until the next statement is generated.

So, 

Interest for 21 days on Rs. 10,000: 241.56 (same as earlier)

Interest for 15 days on Rs. 5,000: 15*5000*3.5%*12/365 = 86.4

Total interest charged: 328

Scenario 3: Partial payment after due date

Payment done: Rs. 5000

Date of payment: 28th May 2021

Next statement date: 6th June, 2021

Interest for 28 days: 28*10000*3.5%*12/365 = 322.2

Interest for 9 days from 28th May to 6th June on balance amount: 9*5000*3.5%*12/365 = 51.8

Total interest charged: 374

Additionally, you may also have to pay a late payment penalty since you did not pay the minimum due amount on or before the due date. 

Conclusion

Thus, your credit card interest keeps on increasing the more you delay the payment. You can easily calculate your credit card interest using a power of compounding calculator available online on various financial websites. If you pay the entire outstanding amount before the due date, your charged interest will be reversed, and you end up paying no interest.  On the other hand, if you pay a partial amount, interest is still charged for the entire amount until the first payment date, and on the remaining amount until the next statement date.

  

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