How many times have a got a shock when you received your credit card bill?. It is very common for some of us to make sure that credit card companies get wealthy at our expense. It was in 2008 when I got the first shock. I had spent Rs.28002.5 on the card and for some reason I paid Rs.28,000.
Do you know how much was the charges levied? It was approximately Rs.1684 including all late fees, interest and taxes. That is a day when I realized ‘never have outstanding on credit cards as much possible. But how do you know how much you’ll be charged and why?.
You might have faced a similar situation and didn’t know how the Bank arrived at so much charges/fine. Hence we are sharing How to calculate credit card late payment fees and finance charges.
Financial organizations such as banks issue the credit cards, which is a payment card. And they do it for a reason. credit cards are one of the most profitable products/divisions of a bank.
How credit cards work?
Imagine this, the banks get typically 9%-11% on home loan per annum. The same is 15% for personal loan. However for a credit card it is anywhere between 24-43% per annum on outstanding amount. This is without the fine amount or late payment fee as they like to call it .
It gives the authority/permission for the cardholder to purchase goods and make payments for services at later date. The issuer creates the account as a revolving credit account and agrees to a particular amount of the credit limit. The user then pays the due amount within the time period or has to pay with interest and charges after the time period.
Credit card is different from the charge card. A charge card typically requires monthly payment. In contrast, the credit card holder can continue to utilize the line of credit each month and debt, subject to payment on time or the payment of the interest as imposed by the issuing bank.
The size of the card follows the ISO/IEC 7810 specifications. The magnetic strip on the card enables the user to carry out the transaction at any outlet that accepts credit and debit cards for purchases. The advantage of the credit card is it is usable across the globe. The exchange rate and fees differ from one institution to another and according to the prevailing rate at the time of the transaction.
In addition to the use of the swipe machines, merchants also accept verbal authorization via the telephone under the card, not present transaction (CNP) procedure. It is essential for the cardholder to carry such a transaction with utmost conscience. They have to ensure that the merchant is a valid PoS(Point Of Sale/Service).
The point-of-sale terminal uses the machines to verify the card authenticity by linking it to the bank database. As soon as the magnetic strip receives authenticity, the deduction occurs automatically, and the buyer signs the receipt of the purchase.
The chip system on the card is the new member of the ISO group and helps in storing every detail of the card transaction. For CNP transaction, merchants verify the authenticity and physical possession of the card by asking additional security code printed on the backside of the card, expiry date, and billing address.
A few banks also offer the flexibility to send PIN code for online transactions to the registered mobile number. Such a step avoids the misuse of the card by any other person.
As a cardholder, you will receive monthly statements via email or through post in physical form. The statement contains details related to the transactions performed in the last month, the total amount owned, outstanding fees, due date and chargeable amount if paid after the due date.
The card issuer specifies the minimum amount payable by a particular date. The issuer will charge a penalty for late payment and additional charges as stated at the time of applying for the card.
You can also view your monthly statements at any time by choosing online banking option. Upon registering, you can login to your banking account from your comfort and choose to view monthly transactions, get statements and pay credit card bills.
You can also set instructions to pay the credit bills to a defined amount every month on a specific date. The multiple payment options within the statement period enable you to utilize the credit limit to the maximum and in several ways.
Related post: 10 ways to get loans fast by improving credit score
How to calculate Credit card Late payment fees and finance charges
The calculation of the late payment fees and finance charges differs from one issuing bank to another. The organization calculates the interest on the outstanding credit balance. It is essential for you to memorize and adhere to the finance charges by the credit card issuer to avoid unwanted expenses in the end.
Like you, many others give importance to the annual charges, card renewal fees, add-on card charges and transaction fees. However, it is imperative for you to consider the interest rate, which typically creates a nightmare if you do not understand the particulars in detail.
Every bank in India calculates the interest rate as a monthly percentage (that changes according to the RBI instructions) and on the average daily balance method. The formula to calculate the interest is as follows:
Calculated interest = (outstanding amount x monthly percentage x 12 months) x No. of days/365
Another vital point, which you should examine, is the grace period offered by the banks. The grace period is usually one cycle(during initial card grant period)+20 days. This si a revolving credit period. If you repay the amount within the grace period, you will avoid the late payment and finance charges.
In my case, my statement is generated on 10th of month and due date is usually 30th of month. I have 50 days grace period. So when I swipe my card on 11th Jan 2015, the charge will reflect in 10th Feb 2015 statement and my payment is due on 1st March. This period from 11 January-01 March is grace period.
Nevertheless, if you do not complete the payment within the stipulated time, you will have to shell out additional amount in terms of fees and taxes. The grace period varies from one bank to another and according to the type of credit card.
Consider the following example that explains in detail about the credit card late payment fees and finance charges:
Let us say that X Bank credit card has a grace period of 60 days. The billing date is on eighth of every month. The cardholder is free to use the card from 9 January to 7 February. The bill generates on 8 February, and the due date is usually 10 March. The credit period for different purchases changes according to the date. For example, the credit grace period for a purchase made on 20 January is 49 days, and the credit period for 15 February is 23 days.
The interest rate is applicable for withdrawing money from ATMs using the credit card. There is no grace period applicable to this transaction, and every bank charges the interest rate right from day one.
The addition of the interest rate continues until you make the repayment. You will have to be careful while withdrawing money from ATMs. The interest rate is usually 3.5% interest per month and a one time fee of Rs. 300 or 2.5% of withdrawal amount(whichever is higher).
Every bank in India specifies a due date and the minimum amount you have to pay for the total purchases carried out. If you do not pay the minimum amount and if the entire amount is due, the bank will impose interest on the outstanding amount along with the spending in the current month.
It continues until you repay the debt amount in full. Additionally, if you fail to repay the amount, the bank cancels the grace period from the following month. You will also lose the grace period if you choose cash advancement option using the credit card.
The late payment fees add to the already debt and increases the overall payment. Banks charge the credit card late payment fees if you neglect to make the payment before the due date. The price varies according to the card, bank, and the outstanding amount.
For instance, HDFC bank charges Rs. 500 as late payment fees for credit bills worth between Rs. 5,001 and Rs. 20,000. It goes to Rs. 700 if the credit bill is above Rs. 20,000. For this reason, the late payment fees change according to the debt amount you possess on the card.
Below is the illustration to calculate the late payment charges. We are assuming that the due date is 18th of every month, and there is no outstanding credit balance as due. We also assume that the monthly interest rate is 3.60%, and the late payment fee is Rs. 400. Below is the transaction detail:
|10 March||POS Purchase – Reliance Digital||Rs. 20,000|
|15 March||POS Purchase – Nike||Rs. 8,000|
|18 March||Statement date||Due Amount = Rs. 28,000Minimum Amount Due = Rs. 1,000|
|12 April||Payment to Credit account||Rs. 1,000|
|14 April||POS Purchase – Petrol||Rs. 3,000|
|16 April||Payment into Credit Account||Rs. 20,000|
On the statement date, the bank calculates the amount payable using the formula and add late payment fees. Hence,
- Interest on Rs. 20,000 @ 3.60% pm from 19 March to 11 April (i.e. 24 days) = Rs. 568.109
- Interest on Rs. 19,000 @ 3.60% pm from 12 April to 14 April (i.e. 3 days) = Rs. 67.463
- Interest on Rs. 8,000 @3.60% pm from 19 March to 14 April (i.e. 27 days) = Rs. 255.649
- Interest on Rs. 7,000 @ 3.60% pm from 16 April to 18 April (i.e. 3 days) = Rs. 24.854
- Interest on Rs. 3,000 @ 3.60% pm from 14 April to 18 April (i.e. 5 days) = Rs. 17.753
Therefore, the total interest is = Rs. 933.828
Considering a credit card late payment fee of Rs. 400, sales tax at 12.36%, additional charges, and principal balance amount, you will pay:
Total Amount Due = Total interest + Late payment fee + Service tax + Outstanding amount
= Rs. 933.828 + Rs. 400 + Rs. 115.421 + (Rs. 3,000 + Rs. 7,000)
= Rs. 11,449.249 = Rs. 11,449.25 (round-off) + additional charges
The finance costs and other fees are subject to alteration from time to time and at the sole discretion of the bank. In addition to these fees, the card issuer also charges overlimit penalty if you exceed the credit limit of the account.
Remember, even if you have Rs 100 balance in your credit card payment, the bank will calculate interest for entire outstanding amount as per last bill. All your new transaction will also cease to have grace period and will be charged interest instantly.
The above illustration will give you an idea about the credit card late payment fees and finance charges. Go through the Most Important Terms & Conditions document of the bank to understand the interest rates and the grace period.
You can get more clarity, if you go through below documents from specific banks. But like all financial calculations, its little boring to read though :).
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