What is the first thing that comes to your mind when you apply for credit card? The answer would most probably be annual charges, renewal fees, add-on card charges and transaction fees. But hardly we think about the interest and late payment fees that take a lot out of our pocket. It is important to pay attention to such charges so that you would be in a good position to pay off the debt on time and avoid penalty that accrues on late payment. Let’s see the calculation made below.
Calculation method
Finance charges represent a certain fee charged on the outstanding balance on the credit card. These charges include the interest cost of debt, account maintenance fees, late charges and transaction fees. After knowing the definition, let just focus on the method to calculate the finance charges. Banks in India calculate interest rate as a monthly percentage, which varies as per the instructions of the RBI, and on the average daily balance method. Let’s see the formula by which interest is calculated.
Interest=outstanding amount x monthly percentage x12 months x number of days/365
The interest calculation also depends on the grace period extended by banks across India. Generally, grace period is the sum of one cycle, which is the initial grant period, and 20 days. Late payment can be avoided if repayment is done during the grace period.
For instance, statement generation date is is 10th of every month and due date falls on 30th of month. Let assume the grace period is 50 days. If you swipe your card on 11th March of a certain year, the charge will be shown in the statement on 10th of April. Due date will be 1st of May in that particular year. So, the grace period can be assumed to be from 11th March to 1st May. Failing to pay the amount within the due date will add to the charges and taxes.
Let’s consider another example to know finance charges on credit card in detail
If any specific bank credit card offers a 60-day grace period, with the billing date being 8th of April in a particular year. Due date will be May 10 on most cases. Credit period for purchases change as per the date. Let’s assume that the credit grace period is 49 days if you have purchased via credit card on March 20. Credit period is 23 days for the purchase made on April 15.
For example, late payment fees charged by HDFC Bank is Rs 500 on bills of up to Rs 20,000, and rises up to Rs 700 if the billing amount exceeds Rs 20,000. So it is clearly proven that you late payment charges will be more when the bill amount is higher. Suppose the late payment fee is Rs 500 and the monthly interest rate is 2.70%. Let’s go through the table in detail.
| Date | Transaction | Amount |
|---|---|---|
| April 10 | POS Purchase Adidas | Rs 30,000 |
| April 15 | POS Purchase-Samsung | Rs 10,000 |
| April 18 | Statement due | Due Amount=Rs 40,000, Minimum Amount Due=Rs 2,000 |
| May 12 | Payment to credit account | Rs 2,000 |
| May 14 | Card swipe at petrol pump | Rs 3,000 |
| May 16 | Payment into credit account | Rs 30,000 |
Total amount payable is the sum of interest, late payment fees, service taxes, etc.
Interest on Rs 30,000 at 2.70% p.m. from April 19 to May 11 (23 days)=Rs 612.493
Interest on Rs 28,000 at 2.70% p.m. from May 12 to May 14 (3 days)=Rs 49.70
Interest on Rs 10,000 at 2.70% p.m. from April 19 to May 14 (26 days)=Rs 230.794
Interest on Rs 8,000 at 2.70% p.m. from May 16 to May 18 (3 days)=Rs 21.304
Interest on Rs 3,000 at 2.70% p.m. from May 14 to May 18 (5 days)=Rs 13.315
Total interest amount is Rs 927.606
Therefore, the total interest is=Rs. 933.828
Total Amount Due=Total interest + Late payment fee + Service tax + Outstanding amount