A Guide To Credit Card Interest Rates In India

By Author: Shreya Eppili
Total Articles: 52
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The percentage of individuals carrying debt each month has increased to 46% from 39% in the past year. With inflation on the rise, more people depend on their Credit Cards, making it essential to understand how interest rates are calculated to avoid debt traps. Here are insights on Annual Percentage Rate, prime rate, compound interest, Daily Periodic Rate, and variable rates that shape the cost of borrowing.
Credit Card apply is a wise decision. It is a powerful tool that makes your financial management convenient. You should use it carefully. Several factors contribute to the calculation of Credit Card interest rates. While it can be hard to make sense of them, here is a guide on selecting one that suits your budget.
Factors affecting Credit Card interest rates
Several factors contribute to calculating Credit Card interest rates. Let us discuss each in detail, along with the relaxations available for cardholders:

Annual Percentage Rates

The APR is ...
... the annual percentage cost of borrowing on a Credit Card. It includes the interest rate and any additional fees that may be charged on the card. APR is charged on the outstanding balance of your Credit Card. For example, if your card’s APR is 15% and you carry a balance of Rs. 50,000 on your card for a year, you are charged 15% of Rs. 50,000 or Rs. 7,500 as interest.

Prime rates

The prime rate serves as a benchmark figure for banks to decide the APR of their Credit Cards. Typically, Credit Card issuers establish their interest rates by adding a margin to the prime rate.

Variable interest rates

Credit Cards do not always have fixed rates. In some cases, banks offer variable interest rates that fluctuate over time, usually in response to changes in the prime rate.

Compound interest rates

Credit Card interest rates are typically compounded. Interest is charged on both the principal and any accumulated interest. Most banks compound interest daily. Therefore, it is advisable to pay your bills on time as soon as the Credit Card billing cycle ends and your bill is generated.

Daily Periodic Rates

DPR determines the daily interest charges on the outstanding balance. DPR is derived from APR by dividing it by the number of days in a year. For instance, if the APR is 15%, the DPR will be 15%/365 = 0.041%. Many banks also offer relaxations in interest rates to Credit Card holders by offering a grace period during which you can pay your balance fully without incurring interest charges.
Alternatively, you may also get interest-free periods on new purchases, which attracts more customers.
Conclusion
These benefits are typically offered to customers with a history of making timely payments. Banks consider your creditworthiness, financial health, and perceived risk when determining the interest rate or grace period.