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How Credit Card Interest Charges work

By the Paise Sherpa

 All credit card users must have seen the "Minimum amount due" bit in your monthly statements. This is the minimum amount that you have to pay in order to keep a good standing with the credit card company. This is merely a percentage of the total dues for the month (generally around 5%) and can change from month to month as per your expenditures. 

If you fell that you can get away with paying just the minimum amounts and not face any penalties you are grossly mistaken! You have fallen for the "minimum dues" trap. 

How Credit Card Interest Works

To know the dangers of paying only the minimum dues, you need to know how interest is charged by credit card companies. There are 3 aspects that you need to remember:

1. Interest Rate

If you study your Card, the monthly interest charged is 3-4%. That may not seem much, but annualized, this interest balloons to 36-48%. Yes you saw that right!

2. Compounding of Interest

This interest generally compounds daily for most credit cards! Those who understand how the magic of compounding works, will now think twice before defaulting on credit cards. 

3. Interest Free Period

Generally you get a 30 day or 50 day interest free period when you have a credit card. However, you do not get any interest free period when you have an outstanding due. So when you pay the minimum dues for a month as per your statement, any expense done in the next month will not get any interest free period and all these expenses will accrue interest which will compound daily! 

There are people who have no knowledge of how credit card interest charges are applying and who keep clearing the minimum dues for months and finally the total dues build up into monstrous amounts -  many many times the total spends done due to the interest charges. People cannot even get personal loans to clear these credit card dues as the credit score is damaged beyond repair. So there are cases, where people have had to take loans from family and friends to clear credit card dues. 

How do you avoid falling in a Credit trap?

1. Reverse calculate the maximum EMIs that you can manage with your income. Keep your monthly credit card spends within this limit. You will need to track how much you swipe. 

2. Avoid impulse purchases.

3. Be smart with your credit card use. For your unavoidable spends try and use co-branded credit cards, cards that give good cash-back and so on. 

Eg) For office goes who spend a certain amount every month on petrol - use linked cards that are tied up with Petrol stations for rewards and benefits. 

For any official travel and accommodation bookings that you need to do and which get reimbursed from your company, use credit cards so that you get a 30 day buffer to pay (remember to claim the vouchers on time with your employer). 

4. Set low credit limits for your cards. 

5. Do not get too many credit cards. 

6. Lastly, simply pay the full dues on time. 



 

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