Nowadays, there are multiple ways of making payments and transactions, apart from using cash. The most widely used method, however, is the use of credit and debit cards. With evolving payment methods, a credit card billing cycles and charges have evolved too.
A credit card is a plastic card which is issued to customers to pay for various goods and services. The cardholder pays the card issuer a requisite amount every month. So how do credit cards work? What are billing cycles? How do they calculate the interest? How to know about your billing cycle and charges? Read on to know more.
How to Read Your Credit Card Bill
A credit card statement usually displays the following details:
- Your credit card number(a 16 digit card number usually starting with a 4 or a 5)
- The date on which the statement was issued
- The due date for payment
- The total amount which is due
- The minimum amount which is due
- Your account summary, which is a detailed list of all transactions conducted before issuing the statement
- Your credit limit
- Interest charges and service tax
How to Calculate Your Due Date
The due date for payment on your credit card depends on the closing date. The closing date is the last day of the billing cycle for your credit card. The due date for payment is usually 25 days after the closing date. Find out the closing date from the credit card statement, and calculate your payment due date. As per RBI guidelines, banks can charge you a penalty only if they have not received payment for three days after the due date. This helps in case your due date falls on a bank holiday, or if you are unable to pay on time.
How is The Interest on Your Credit Card Calculated
To calculate your credit card’s interest, you need to keep two factors in mind, namely your APR and your DPR. The APR or the annual percentage rate, is the rate of interest added to your credit card annually. The tricky thing, though, is the fact that banks add interest to your credit card on a daily basis, using the DPR or the daily periodic rate, instead of adding interest annually. To calculate your DPR, you need to divide your APR by the number of days in a year. To calculate interest, you need to multiply your DPR with your average daily balance.
Credit Card Billing Cycles and Charges
Your credit card usage is divided into separate billing cycles. A billing cycle is a period of time between two different credit card statements. During an ongoing billing cycle, you can make transactions, issue purchases, and transfer balances till your credit limit allows you to. If, under any circumstances, you use more than your credit limit , you may incur an over-the-limit fee. There is, however, a catch to this process. As the balance on your credit card increases, the available credit that your bank lends you diminishes in proportion. To illustrate this, let us take an example. Say that your credit card issuer provides you with a credit limit of Rs. 50,000, and you use Rs. 20,000 of that limit for various purchases. This will result in your credit card balance becoming Rs. 20,000 and your credit limit will decrease to Rs. 30,000 for that billing cycle.
At times due to financial emergencies or unplanned expenditure, one might draw up a huge credit card bill. An easy and hassle free option to pay off the credit card bill would be to explore apps like Moneytap where you can get credit up to Rs. 5 lakhs, withdraw as little as Rs. 3000 and pay an interest only on the amount you have used.
Next time you have any doubts about that bill you receive at the end of each month from your bank, don’t hesitate to go through this guide to credit card billing cycles.