Credit cards are most loved for their buy now, pay later convenience.
Cardholders can make purchases up to the credit limit on their card and pay the amount before the end of the billing cycle. Often cardholders make high-priced purchases resulting in a high credit on their monthly credit card statements.
If a cardholder’s credit card bill has gone up unexpectedly high and he is not sure if he can pay the debt amount at once, he can get the debt amount converted into credit card EMI.
This gives cardholders higher access to credit than what they can currently afford. An Annual Percentage Rate (APR) applies to the unpaid balance on a credit card. APR is the interest chargeable on credit card debts.
Here’s everything you need to know about your credit card EMI.
How does it work?
Often credit card issuers allow cardholders to make big-ticket purchases on their credit cards. The issuer pays the full debt amount to the seller merchant and the cardholder can pay back this amount in EMIs to the card issuer.
Are credit card debts interest-free?
If the cardholder pays the full credit balance before the due date, the issuer does not charge any interest on the debt. However, if the balance is carried forward by the cardholder, the issuer charges interest on the credit balance.
How to convert a credit card debt into EMIs
Unpaid credit card bills, balance transfers, and large spending can lead to a debt on the credit card. Credit card issuers give the facility of paying back the debt in easy instalments to the issuer for an interest. It saves the issuer from facing bad debts and facilitates repayments for the customers.
How to calculate credit card EMI interest rates
Cardholders can calculate the credit card interest rate using the following steps:
- Converting APR into daily rate: The credit card issuers compound interest applicable on credit card balance daily. They add the interest amount to the principal amount by day-end daily. Therefore, the cardholder needs to convert the APR into daily interest rates by dividing the APR by 365. The resultant interest rate is the periodic interest rate or daily periodic rate.
- Calculating the average daily balance: The credit card interest rate depends on the daily balance of the credit card. Therefore, the cardholder needs to find out the daily card balance. A purchase transaction during the billing cycle increases the credit card bill, and a debt payment transaction reduces the bill. Cardholders can calculate their average daily balance by adding the balance for each day of the billing cycle and dividing it by the number of days in the billing cycle. Balances carried forward from the previous month are added to this average, and debt payments are deducted from it.
- Calculating the interest charges: Multiply the average daily balance by the daily rate to get the interest charges. Multiply the result with the number of days in the billing cycle. It is the compounding method of calculating the interest charges.
Factors that determine credit card EMI interest rates
The credit card interest depends on the following factors:
- The prime rate or the current interest rate is the primary determinant of the credit card interest rates. The prime rate changes with changing market conditions and affects the variable APR significantly.
- Card issuers consider the credit history and credit score of the cardholder before deciding the credit card interest rates. Issuers charge a lower interest from cardholders with a higher credit score and a good credit history.
- There can be multiple APRs on a single credit card on different kinds of spending like purchases, cash advances, etc.
- Issuers can offer interest-free durations on the credit card balance as a promotional offer to their customers. The interest rates shoot up significantly at the end of the offer period.
- Customers who have a history of missing repayments have to pay a higher interest rate on their credit card EMIs.
Cardholders can ease their credit card payment burden by converting the debt amount into EMI. However, the EMIs attract an interest rate on them. Cardholders can try to reduce their daily balance or pay the card dues in full to avoid interest payments on their credit cards.