How is credit card interest rate calculated?

    The Annual Percentage Rate of Interest, or APR in short, is the interest charged on purchases and payments made using your credit card. Annual interest rates on credit cards in Singapore range from about 20% to 28% depending on the bank and the type of credit card offered. The APR can be higher than 28% in some cases and is dependent on several factors. While most credit card customers aren’t entirely aware of how the annual interest rate is arrived at, the importance of the question cannot be understated.

    The interest charged on credit cards is an important source of revenue for banks. Banks make millions of dollars through credit card interest rates considering the millions of credit card users using credit as an effective means to meet various aspects of their wants. Coming back to the customer’s take on credit usage, the interest to be paid is certainly a burden of sorts. This is exactly why knowing how interest is calculated and charged on your credit card becomes essential.

    How do you calculate your singapore credit card interest rate?

    The annual rate of interest is calculated by taking into account various factors, one of them being the Daily Periodic Rate. Payment dues can vary from one month to another and is determined by the amount of credit used. In order to know the daily periodic rate, divide the annual interest rate on the credit card by 365. It is imperative to note that the daily periodic rate alone does not influence the interest calculations on your card – your interest rate is calculated by accounting for other factors also.

    For instance, if you were to make a cash withdrawal using your credit card, the Daily Periodic Rate accounts for that as well. Other factors include foreign currency transactions charges, interest free payment windows and more. Cash withdrawals on credit cards attract handling charges equivalent to 5% or 6% of the withdrawn amount along with interest charges of up to 28% p.a.

    How much are you actually paying towards interest? Let us go into slight detail.

    So how exactly does the bank factor in the various parameters and calculate the annual rate of interest. More so, how much are you actually paying towards your credit usage? Now that we understand what the daily periodic rate is and the factors that go along with it in computing the interest rate, let us see how they add up. Here are a few points that will help you form a better understanding.

    Step by Step Procedure to calculate your Credit Card interest in Singapore

    • Your credit card interest is computed on an everyday basis and takes into consideration your daily outstanding balance, unpaid interests from previous statements and cash advances, if any. The term referred to the combined value of these factors is known as the Average Daily Balance.
    • The value obtained from the parameters is multiplied by the daily interest rate (daily periodic rate) on your card. The daily interest rate, as mentioned earlier, is calculated by dividing your annual rate of interest by 365.
    • You’d understand that although the interest rate is represented as an annual value, you are actually being charged interest on your card on an everyday basis.

    Credit card interest caluculation Example

    • Say you haven’t made any payment during your interest free period and the amount owed by you starts accumulating interest. Let us consider the amount to be S$2,000.
    • You’ve not made any payment for the first 10 days and on the 11th day S$1,000.10 days later, you pay S$500.
    • Note that as mentioned earlier, the interest is charged on the unpaid balance.
    • So your average daily balance will be (calculated on unpaid amounts and the number of days for which the amount remains unpaid) calculated as follows:
    • (10x1,000 + 10x1000 + 10x500)/30 = S$833.3
    • So your Average Daily Balance is S$833.3.
    • Consider the annual interest rate on your card to be 25% p.a. Consequently, the daily periodic rate will be 25/365 = 0.068.
    • Putting all these values together, your interest for the next month will be 833.3x0.068%x30 = S$16.99.
    • The interest is calculated at a compounding rate and is added to the unpaid balance.

    Thus, if the annual interest rate on your card is 20% and the balance on your card throughout the entire year is S$2,000, you won’t just be paying S$400 as interest for the whole year. Interest on your card is calculated on an everyday basis at a compounding rate – meaning, the more you wait to pay your credit card outstanding balance, the more interest you’re charged on it.

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