This is sequel to my earlier blog "Debt Trap or Death Trap" which in short describes the menace and mischief of debt recovery agents. But one thing is sure that in modern day life, we can not ignore the benefit of plastic money. What is perhaps required is the proper understanding and judicious use. One thing we should not forget that Banks are not charitable organizations. They are here to make money. So be careful and avoid the habit of a compulsive spender.
In this blog I will be focusing on some basic issues that surround the credit card like interest rate calculation ,how to choose a credit card , interest periods etc ,etc. Very rudimentary but essentials.
Key questions to consider when choosing a credit card:
Is there an introductory rate, what is it, and how long does it last?
After the introductory interest rate, what will my rate be?
Is there an application fee?
Are there processing fees?
Is there an annual fee?
Is there a late fee?
Is there an over-the-limit fee?
Are there any other fees, like account-termination fees or balance-transfer fees?
When and how can a variable rate be changed?
When and how can a fixed rate be changed?
What is the grace period before interest is applied?
How will you inform me of any changes in my contract?
Will the company inform me if I am about to go over my limit?
If I go over my limit, what happens?
What is the company policy if I have trouble paying my bill?
| Card Name | Annual Fee | Grace Period | APR | Maximum Credit Offered | Perks/Benefits |
Checklist for Comparing Credit Card Offers
Review your basic goals for using a credit card and use the above table to compare terms for credit card offers.
Review your basic goals for using a credit card and use the above table to compare terms for credit card offers.
How credit cards calculate interests?
How and how often your credit card calculates your interest makes a big difference. Know what you are getting before you sign up.
Average Daily Balance This is the most common calculation method. Each morning in the billing period, your balance is credited with any payments or refunds. Under some plans, any new purchases are also added. At the end of the billing cycle, daily balances are added and divided by the number of days in the billing period to get the "average daily balance."
Adjusted Balance This is an advantageous method for cardholders. Payments or credits received during the current billing period are subtracted from the balance at the end of the previous billing period. Purchases made during the billing period aren't included. This method gives you until the end of the billing cycle to pay and avoid the interest charges.
Two-Cycle Balance The average daily balance is calculated from two billing cycles rather than one, and finance charges are higher. The grace period for customers who carry a balance is wiped out. If the bill is not paid in full at the first billing, interest becomes retroactive back to the purchase date.
Reducing Your Interest Rate: It is possible to qualify for a lower interest rate on your credit cards; the bank won't automatically inform you of this. Call the customer service line to ask if you qualify for a lower rate. If you have been paying at least the minimum balance due on your bills every month, your credit with the bank might qualify for a reduction.
Many credit cards solicit new customers by offering low introductory. The credit card company will not remind you that the introductory rate period has ended, and you may be charged a significant additional fee to transfer your balances from your other credit cards.
Now let us see how some of the Indian banks calculate interest rates on credit card balance.
DEUTSCHE BANK:
Interest Calculation: Interest is calculated on a daily basis on the current outstanding balance of the Cardholder. Interest is levied if Total Amount Due is not paid off by the due date. Interest is also levied on all fee, charges, interest and service tax.
Statement Cycle: 25th of each month
| Type | Transaction Date | Amount |
| Shopper's Stop | 14-Jan-06 | 10,000.00 |
| Payments Received | 10-Feb-06 | 7,000.00 |
Example for interest computation: If full payment of Rs. 10,000 is made by Payment Due Date no interest would be levied. In the above example interest will be charged as follows in the statement dated 25-Feb-06:
| Type | Transaction Date | Outstanding Balance | Up to Date | Days | Interest Rate | Interest |
| Shopper's Stop | 14-Jan-06 | 10,000.00 | 25-Jan-06 | 11 | 2.95%p.m. / 35.4% p.a. | 106.68 (11/365 days*35.4%* 10,000) |
| Opening Balance on 25-Jan-06 | 10,000.00 | 10-Feb-06 | 16 | 2.95%p.m. / 35.4% p.a. | 155.17(16/365 days* 35.4%* 10,000) | |
| Payment of Rs.7,000 on 10-Feb-06 | 10-Feb-06 | 3,000.00 | 25-Feb-06 | 15 | 2.95%p.m. / 35.4% p.a. | 43.64(15/365days*35.4%* 3,000) |
| Total Interest Payable | 305.49 | |||||
How are interest rates calculated on ICICI Bank Credit Card?
Interest charges are applicable only if the part payment facility (revolver facility) is chosen. It is governed by a rate of interest. The interest accrual is on a daily outstanding balance. The monthly application of interest happens on the statement date.
Interest charges are applicable only if the part payment facility (revolver facility) is chosen. It is governed by a rate of interest. The interest accrual is on a daily outstanding balance. The monthly application of interest happens on the statement date.
An Example of interest calculation:
Taking an example where the customer has all retail transaction - no cash withdrawals).
As the customer has made a part payment, interest is charged on transactions in the previous month from the respective transaction date up to the statement date. Then on TAD (total amount due) from the statement date up to the part payment date.
Then on the balance amount (after deducting payment from TAD) from the part payment date up to the next statement date.
And if there are any fresh purchases interest is charged on the same from respective transaction date up to statement date.
Please note if the customer makes a part payment he does not enjoy interest free days on fresh purchases.
Formula: Principal amount*rate of interest*no of days.
Formula: Principal amount*rate of interest*no of days.
Statement of Mr. Ramesh Kumar who is holding a Sterling Silver Card
STATEMENT DATE:1ST AUGUST
TRANSACTION ON 15TH JULY=Rs600.00(purchase)
TRANSACTION ON 30TH JULY=Rs100.00(purchase)
MAD=Rs100.00
TAD=Rs700.00
STATEMENT DATE:1ST SEPTEMBER
TRANSACTION ON 3RD AUGUST=Rs.500.00(purchase)
TRANSACTION ON 20TH AUGUST=Rs600.00(paid back to bank)
INTEREST ON 1ST SEPTEMBER=Rs40.52
MAD=Rs100.00
TAD=Rs640.52
MAD-Minimum amount due
TAD-Total amount due
TAD-Total amount due
The interest of Rs.40.52 has been calculated as below:
The total outstanding for the month of Aug was Rs.700 against which the Mr. Ramesh Kumar has made a part payment of Rs.600, thus interest is charged.
On transaction dated 15-July-02 (Rs 600) from transaction date up to Statement date 01.08.2002.
Then on TAD i.e. Rs.700 from statement date 01.08.2002 up to part payment date 20-08.2002.
Then on balance 100 (700-600) from part payment date 20.08.2002 up to next statement date 01.09.2002.
Then on the fresh purchases from 03-08.2002 up to 01.09.2002.
Calculation Part:
600*2.95%*18/30 days=Rs.10.62
100*2.95%*3/30 days =Rs.0.30
700*2.95%*20/30 days=Rs.13.77
100*2.95%*11/30 days =Rs.1.08
500*2.95%*28= (10.62+0.30/30 days =Rs.14.75
TOTAL=10.62+.30+13.77+1.08+14.75=Rs.40.52
What is interest period and how it is calculated?
Let us assume the credit card says interest free period is 51 days. In this case customer gets an interest free period ranging from 21 to 51 days depending upon the date of purchase and date of billing. Usage under Credit Card enables the cardholder to have a free Credit Period of 51 days depending upon the date of purchase and the date of billing. If the transaction happens to be a day after the billing date then this transaction will be billed in the next billing cycle. In such cases the cardholder may receive a maximum interest free credit period of about 51 days. However if the purchase is made a day or two prior to the billing date then that transactions will appear in the very next billing date in which case only a free credit period of about 21days will be available. Thus on an average the cardholder shall receive an interest free credit period of 35-37 days depending on his date of purchase.
This interest free credit period will be available only if the "Total payment amount due" on the Card stands paid in full. However if the cardholder paid only the "minimum payment due" or an amount less than the "total payment due" the interest free credit period will not be available and applicable service/finance charges will be levied from the date of transaction.
Precaution while using credit card
Report lost or stolen cards immediately
Never allow anyone else to use your card
Ensure that your card is signed on the signature panel as soon as you receive it
Never write down your PIN - memorize it
Ensure that you get your card back after every purchase
Always check sales vouchers/charge slips including purchase amount when you sign them - keep copies of sales vouchers and ATM receipts.
Never give your credit card number over the phone or on the Net, unless you are dealing with a reputable company and have initiated the call yourself
Always check your billing statement, especially after a trip. Check the amounts of your purchases with the charge slips - specifically look for transactions which are not yours.
Make a record of your credit card PIN numbers and telephone numbers for reporting lost or stolen cards. Keep that list in a safe place.
While traveling (abroad or within the country), ensure that you carry the telephone number of the card company
Know who has access to your cards. If your credit card is borrowed by a family member (spouse, child, parent), with or without your knowledge, you may be responsible for their purchase/cash withdrawal.
NOW, HERE IS A VIDEO FOR MY AMERICAN FRIENDS. DISCOVER YOURSELF WHAT IT IS?
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