Many of you still don’t quite understand how Finance Charge is calculated on balance amount by credit card companies. I found that HDFC Credit Card is one of the better ones who explain it very clearly.
Here is a step by step guide on how Finance Charges are calculated.
- Assume you have Zero balance on your card to begin with.
- You now make a Biz Bazaar household purchases worth Rs 15,000 on April-10th. Then on 18th April you buy a Mobile Phone worth Rs 5,000. Lets say your billing cycle ends on the 18th of every month. So your April-18th credit card statement lists Total Dues as Rs 20,000 and Minimum Payment of Rs 1,000.
- Due Date for making entire payment or at least minimum payment is May-2nd.
- Lets assume you miss the May-2nd deadline. This is very bad to your credit history. Creditors think you don’t even have the money to make minimum payment. Missing Minimum Payment will attract you additional fees known as Late Payment Fees.
- If you make minimum payment by May-2nd then their is no Late Fees in your next credit card bill.
- Assume you have not made a minimum payment by May-2nd and on 12th May you pay Rs 2,000.
- You purchase groceries worth Rs 1,000 on May-14th.
- On May-15th you make a payment of Rs 15,000
- Thus on your May18th Bill you will see the following,
- Late Payment Fees of Rs 350
- Interest on Rs 15,000 @ 2.95% pm [whatever your APR is] from 18th April to 12th May.
- Interest on Rs 13,000 @ 2.95% pm from 13th May to 15th May
- Interest on Rs 5,000 @ 2.95% pm from 18th April to 15th May
- Interest on Rs 3,000 @ 2.95% pm from 16th May to 18th May
- Interest on Rs 1,000[Fresh Purchase] @ 2.95% from 14th May to 18th May
Add Service Tax on Late Payment Fees + Interest.
Total outstanding = Rs 4,000 [Rs 3,000 from Previous Bill and Rs 1,000 Fresh Purchase] + Service Tax+ Late Fees + Interest = Rs 5,000 say.
Thus you are un-necessarily paying a hefty fees of Rs 1,000 to credit Card company on just Rs 4,000 outstanding balance.
Always pay at least minimum fees by due date. Still better, pay off the entire debt vy due date to avoid any FEES!!!!