Credit Card interest rates decoded: Key types and factors affecting them

According to Bankrate.com, the percentage of individuals carrying debt from month to month has increased to 46% from 39% in the past year. With inflation on the rise, more people depend on their Credit Cards, making it essential to understand how Credit Card interest rates are calculated to avoid debt traps. 

Credit Cards are powerful tools that make your financial management super-convenient. However, they can also cost a lot if you don’t choose them wisely. There are a variety of factors at play in calculating Credit Card interest rates. While it can be hard to make sense of them, we are here to walk you through the labyrinth so you can select one that suits your budget. 

Which factors affect Credit Card interest rates?
 

There are several factors involved in calculating Credit Card interest rates. Let's delve into the key ones -

• Annual Percentage Rate (APR)

The APR is the annual percentage cost of borrowing on a Credit Card. It includes the interest rate and any additional fees charged on the card. APR is charged on the outstanding balance of your Credit Card. For example, if your card has an APR of 15% and you carry a balance of Rs 50,000 on your card for a year, you will be charged 15% of Rs 50,000 or Rs 7,500 as interest.

• Prime rate

The prime rate serves as a benchmark figure for lenders to decide the APR of their Credit Cards. Typically, Credit Card issuers establish their interest rates by adding a margin to the prime rate.

• Variable interest rate

Credit Cards don't always have fixed rates. In some cases, lenders offer variable interest rates that fluctuate over time, usually in response to changes in the prime rate.

• Compound interest 

Credit Card interest is typically compounded. The interest is charged on the principal and any accumulated interest. Most lenders compound the interest daily, which is why it is advised to pay your bills on time as soon as the Credit Card billing cycle ends and your bill is generated.

• Daily Periodic Rate (DPR)

DPR is used to determine the daily interest charges on the outstanding balance. DPR is derived from APR by dividing the former by the number of days a year. For instance, if the APR is 15%, the DPR will be 15%/365 = 0.041%.

Relaxations in Credit Card interest rate
 

Lenders may offer relaxations to Credit Card holders in the following ways -

• Grace periods

Some lenders offer a grace period, during which you can pay your balance in full without incurring any interest charges.

• Interest-free periods

Some lenders may offer interest-free periods on new purchases to attract more customers.

It is important to note that these benefits are generally given to customers with a good credit history of timely payments. Lenders consider your creditworthiness, financial health, and perceived risk when determining the interest rate or grace periods they offer you.

To sum it up
 

It is important to maintain a high credit score and good repayment history to be considered a low-risk borrower and qualify for lower rates or no-interest periods. Additionally, you can compare different lenders and select the most favourable Credit Card interest rate.

IDFC FIRST Bank is the first Indian bank to introduce a dynamic APR range, from 9% to 36% per annum. Apply for an IDFC FIRST Bank Credit Card today and save money!

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.