How does credit card interest rate work & how to get a lower rate?

By improving credit scores, negotiating better terms, and utilising smart payment strategies, you can significantly reduce credit card costs and avoid falling into debt trap

In an era of digital payments and cashless transactions, credit cards have become an integral part of the Indian consumer's financial toolkit.

 

However, many cardholders remain unaware of how credit card interest rate works & how to get a lower rate?

 

There are largely two types of interest rates applicable with credit cards:

 

Interest on non payment: This interest rate on credit cards is represented with a monthly percentage which becomes effective once the customer has missed a bill payment cycle and gets added in the next bill cycle till the entire bill is repaid.

 

Typically, it is between 2.5 per cent and 3.5 per cent per month and can quickly become a burden on finances.

 

Interest on cash withdrawal: This interest rate on credit cards is also represented with a monthly percentage. However, it is effective since the day cash is withdrawn.

 

How is credit card interest rate calculated?

 

Credit card interest rate is represented as the annual percentage rate (APR) in the credit card statement. This is the charge applicable for the entire year rather than the monthly charge.

 

The formula to calculate the interest rate is as follows: (No. of days from the date of transaction x outstanding amount x interest rate per month x 12 months)/365.

 

“The best way to get a lower rate is to first read in detail the various charges levied at the point of applying for it, and cards with lower interest rate may be preferred. However, the best strategy with credit cards is always to make payments on time so that one can reap the benefits of an interest-free period and also build a good credit history,” said Prashant Kumar at Founder of Kredit.Pe.

Strategies to secure lower interest rates

 

Improve your credit score: Maintain a good payment history and keep your credit utilisation low.

 

Pay more than the minimum: Always aim to pay more than the minimum payment required. This reduces your principal balance faster and minimises interest charges over time

 

Negotiate with your bank: Many cardholders don't realise that interest rates can be negotiated. If you have a good payment history, don't hesitate to ask your bank for a lower rate.

 

Balance transfer: Consider transferring your balance to a card with a lower interest rate. Many banks offer introductory low or zero per cent interest periods on balance transfers.

 

Opt for a secured credit card: These cards, backed by a fixed deposit, often have lower interest rates due to reduced risk for the bank.

 

Compare and switch: The Indian credit card market is competitive. Research and switch to a card that offers better rates and suits your spending pattern.