What does 20% interest mean?

What does 20% interest on a credit card mean? If your credit card has an interest rate of 20%, that 20% rate is divided by 365 days and multiplied by your average daily balance to determine how much interest you owe on an unpaid balance.

The interest rate on a credit card is also called a ‘finance charge’ and is the rate charged by credit card issuers on the amount that has been borrowed. However, the interest charges are applicable only to those cardholders who don’t pay their outstanding in full. For instance, if your credit card bill amount for a previous billing cycle is Rs.10,000 and you wish you make a partial payment, either minimum amount due or even lesser than that, then the bank will levy finance charges as per its policy.

Formula used to Calculate Interest on Credit Card

(Number of days counted from the date of transaction x outstanding amount x Interest rate per month x 12 month)/365.

Credit Card Interest Rates by Top Banks

The table showcases the monthly and annual percentage rates (MPR% and APR%) of credit cards offered by top banks like HDFC, SBI, Axis, HSBC, IndusInd, Kotak Mahindra, RBL, and Yes Bank, providing an overview of their varying interest rate ranges.

Bank Name Monthly Percentage Rate (MPR)% Annual Percentage Rate (APR)%
HDFC Bank 3.40% 40.80%
SBI Bank Up to 3.50% Up to 42%
Axis Bank Up to 3.60% Up to 52.86%
HSBC Bank At the discretion of the bank At the discretion of the bank
IndusInd Bank Up to 3.83% Up to 46%
Kotak Mahindra Bank Up to 2.49% Up to 29.88%
RBL Bank At the discretion of the bank At the discretion of the bank
Yes Bank Up to 2.4% Up to 28.8%

How are Credit Card Interest Rates Calculated?

Credit card interest rate is calculated as the Annual Percentage Rate (APR) of charge. It is the interest rate for the whole year rather than a monthly rate. However, while calculating interest rate for monthly dues, the monthly percentage rate (MPR) will be applied to the transactions. The APR and MPR vary from one bank to another and one card to another. While applying for a credit card, it’s important to know how much APR is being charged on a particular card.

Understanding how interest is charged on your credit card is important to manage your finances effectively. Here’s an illustration to explain how your card issuer calculates interest:

Date of Transaction 1 April 2023
Amount Rs.20,000
Date of Statement Generation 1 May 2023
Minimum Amount Due 5% of outstanding balance, thereby Rs.1,000
Bill Due Date 26 May 2023
Monthly Credit Card Interest Rate 3%
Late Payment Fee Outstanding balance less than Rs.100 – NilBetween Rs.101-Rs.500 – Rs.100Rs.501 – Rs.5,000 – Rs.500Rs.5,001- Rs.10,000 – Rs.600Rs.10,001 – Rs.25,000 – Rs.750Rs.25,001 – Rs.50,000 – Rs.900Rs.50,001 and above – Rs.1,000
  1. Full payment by the due date (26 May 2023): No interest charges are applicable.
  2. Partial payment before the due date (26 May 2023): Partial payment: Rs. 5,000
    1. Interest charged on Rs.20,000 for 21 days: [(21 x Rs.20,000 x 3% x 12)] / 365 days = Rs.414.24
    2. Interest charged on the Rs.15,000 balance for 15 days: [(15 x Rs.15,000 x 3% x 12)] / 365 days = Rs.221.91
    3. Total interest payable: Rs.414.24 + Rs.221.91 = Rs.636.15
  3. Partial payment after the due date (26 May 2023): Partial payment: Rs.5,000
    1. Interest charged on Rs.20,000 for 28 days: [(28 x Rs.20,000 x 3% x 12)] / 365 days = Rs.552.33
    2. Interest charged on the Rs.15,000 balance for 9 days: [(9 x Rs.15,000 x 3% x 12)] / 365 days = Rs.133.15
    3. Total interest payable: Rs.552.33 + Rs.133.15 = Rs.685.48
  4. Partial payment after the due date with fresh transactions: Partial payment: Rs.5,000 +Fresh transaction: Rs.2,000
    1. Interest charged on the outstanding balance for 15 days: [(15 x Rs.20,000 x 3% x 12)] / 365 days = Rs.295.89
    2. Interest charged on new outstanding balance with a fresh transaction for 13 days: [(13 x Rs.22,000 x 3% x 12)] / 365 days = Rs.282.08
    3. Interest charged on balance after partial payment for 9 days: [(9 x Rs.17,000 x 3% x 12)] / 365 days = Rs.150.90
    4. Total interest payable: Rs.295.89 + Rs.282.08 + Rs.150.90 = Rs.728.87

Note: This is an illustrative example. The interest rate on a credit card can vary from bank to bank. To know more about the interest rate on your credit card, contact your bank.

When is Interest Charged on Credit Cards?

As mentioned earlier, if you pay the total amount due (TAD) on your credit card before the due date, the interest charges will not be applied. Let’s see the cases when the finance charges are applicable on credit card transactions.

Case: 1 – When you make no credit card payment: When you entirely skip your credit card payment in a month, the bank will start charging interest on the total amount due as well as on all the new transactions from the date of transaction till the time all the previous dues are paid in full.

Example:

Transaction Amount
Transaction amount on 10 July 2023 Rs.5,000
Total Amount Due (TAD) on statement dated 15 July 2023 Rs.5,000
Minimum Amount Due (MAD) on statement dated 15 July 2023 (usually 5% of the TAD) Rs.250
Payment Due Date – 3 August 2023
Transaction amount on 7 August 2023 Rs.1,000
Transaction amount on 10 August 2023 Rs.500
Interest charges levied on next statement dated 15 August 2023 at 3.00% Monthly Percentage Rate (MPR)
Interest on Rs.5,000 for 30 days (10 July to 10 August) Rs.147.94
Interest on Rs.1,000 for 9 days (7 July to 15 August) Rs.8.87
Interest on Rs.500 for 6 days (10 July to 15 August) Rs.2.95

Interest rates vary from bank to bank. This is an illustrative example with the interest rate taken at 3.00% MPR and calculated by the formula: (Number of days counted from the date of transaction x Outstanding Amount x Interest rate per month x 12 months)/365.

Case: 2 – When you pay only the minimum amount due: If you pay only the minimum amount due on your credit card, interest will be charged on the remaining amount and on all the new transactions till the previous balance is paid in full.

Case: 3 – When you pay less than MAD: If you wish to pay an amount that is less than your minimum amount due on your credit card, the entire outstanding amount will attract finance charges along with all the new transactions, till the previous outstanding amount is cleared in full.

Case: 4 – When you withdraw cash: If you withdraw cash using your credit card, you are availing the cash advance facility, hence, the withdrawn amount will attract finance charges from the date of withdrawal till the amount is paid back in full.

Case: 5 – When you carry forward outstanding: If you haven’t cleared your previous month’s outstanding in full, the bank will carry forward the remaining amount to the next billing cycle. In such cases, based on the repayment amount, either MAD or less than MAD, the interest rate will be charged on the outstanding as well as on all the new transactions, till the previous dues are cleared completely.