The Reality of Credit Card Interest Rates
Credit cards offer interest-free periods up to 50 days, making them highly convenient. However, if you fail to clear the total due amount by the payment deadline, the bank applies interest charges. Unlike standard home or personal loans, credit card interest rates are compounding and range from 36% to 48% per annum (APR).
Understanding these charges is crucial for credit health. Knowing how these dynamics affect your CIBIL score is important, as covered in our guide on improving your CIBIL score with credit cards.
The Mechanics of Daily Balance Calculation
Banks calculate credit card interest using the Daily Balance Method. Here is how it works:
Interest = (Average Daily Balance * Daily Interest Rate * Number of Days). Crucially, the moment you carry over a balance, the interest-free grace period on all fresh purchases is suspended until the entire outstanding amount is cleared to zero.