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Before you get a credit card, it is important you understand how the interest is calculated, if you have not paid the complete bill amount. There are various finance assessment tools that will help you calculate the minimum amount, the total interest that must be paid, and the next payment due against the unsettled balance. Some key components used to calculate the interest amount are the annual interest rate, the amount paid, minimum payment percentage and the total bill.
If you have failed to pay your bills on time, you will accumulate a short term loan for which you must pay a higher interest rate. If you pay just the minimum required amount on your card bill, you will have to pay interest on a daily basis. Interest will be charged on the unsettled balance from the statement date and on new expenses charged to your card within the billing cycle.
If you have delayed your payments or gone over your credit limit in any month, then these charges (late payment fee, over-limit fee, etc.) are also added to the calculation towards your interest rate.
Interest is usually calculated on your outstanding balances or dues from your credit card which you would have used to make purchases and payments. The annual effective interest rate in Singapore usually ranges from 24% to 28%. Some banks may even charge higher interest on your purchases.
Most customers are unaware of the way interest rates are usually calculated by the banks. It is always better to get a better understanding of the charges and interest rates involved.
Various factors are considered while calculating your annual interest charges. Interest rate on retail purchases and cash advance are calculated on a daily basis starting from the transaction date and until the payment is made in full.
The following parameters are taken into account for computing your annual interest rate:
Let us take a simple example. For example, consider a credit card with an Annual Percentage Rate of 26% p.a. which has a billing cycle of 30 days. Assume that the unsettled balance is S$1,000 and you pay only the minimum amount which is 25% of the unsettled balance.
Minimum payment = 25% x 1,000 = S$250
If you have no new charges associated with the card in the same period, then –
Unsettled payment = (1,000 – 250) = S$750
Total interest = Unsettled payment x (APR/365) x Number of days in a billing cycle ? 100
The interest accrued on this amount for the next bill will be around S$16. If you incur no other expense, you will end up with a bill of S$766 the next month, and the minimum payment amount will be S$191.50. If this behavior goes on, you will keep paying interest charges, albeit not appearing to be very high, and the total payments to the bank towards the end would become a high number.
The interest-free period is the amount of time wherein you are not charged any interest for the purchases or transactions you make through your card. However, if you clear your existing outstanding bills by the due date, no interest is applicable. If you do not clear the outstanding amount and wish to repay the credit on monthly repayments, interest will be charged for the outstanding amount. While the interest-free period is usually between 20-23 days, it varies from one bank to the other.
You always have the option to either repay the entire amount in full to avoid any interest charges or pay the interest along with the principal amount through monthly repayments.
Retail interest rate: When you do not clear your outstanding credit card balances in full by the due date, an interest is levied by the bank. The annual interest rate or the monthly interest rate will be applicable on the card and this is known as the prime rate.
Cash withdrawal interest rates and charges: When you use the card to withdraw any amount, an interest charge is applicable until the time the entire amount is repaid. Cash advances will attract a higher rate of interest along with a cash advance fee. In Singapore, most banks will charge 5% to 6% interest of the withdrawn amount.
The best way to avoid any interest charges is to ensure that your dues are paid in full or pay the minimum balance amount before the due date to avoid other charges such as late payment fees. You can have a good credit record by promptly paying your credit card bills on time.
Apart from the credit card interest charges, there are various other fees involved that include late payment charges, annual fees, fees on foreign currency transactions, currency conversion fee, etc. When the borrowed credit is carried forward instead of settling it in full, you may end up paying more money to the bank when any of the above charges are involved along with the interest rates.
Proper utilisation of your credit card is very crucial in order to maintain a good credit score. Your credit score and record can further be used for any future references when you need any loans from financial institutions. While a good credit record can fetch you an instant loan, a poor credit score can result in application delays or rejections.
To avoid paying such hefty amount, it is always advisable to pay the entire amount, or as much as you can, on your credit card statement each month.