Credit card is plastic money where you can pay for something expensive without bothering about to put the lump sum amount at the moment. Many credit card banks in UAE offers a wide range of credit cards from air miles credit card to dining benefits. For the promotion of the cards they mention an annual percentage rate or Zero percent rates , but this is only for a short time.
The APR offered by banks are different for person to person which depends upon how you manage your account, your effective interest rate could be higher, or it could be lower. The lower the APR the better for you. So
it is important to know; How to Calculate Credit Card Interest Rates that help you to know the true cost of your debt.
How to calculate credit card interest rates
Before you get to know the method of interest calculation It is best to start from the billing cycle of a Credit Card. If you get a new credit card, you need to choose one date when your bill to be generated.
The general formula to calculate credit card interest : (Number of days are counted from the date of transaction made x Entire outstanding amount x Interest rate per month x 12 months)/365
For example, If you choose 1st as your bill date, you can get an additional 15 to 25 days to pay the bill. Many UAE banks will provide a maximum of 45 to 55 days as a grace period in which you will not be charged any interest on your purchase. If you took a card on November 30 and selected billing cycle date on 1st of every month. Then you’d get the longest grace period by making your purchase on 2nd December because you’d then get the entire 30 days of December till the bill is generated on 1st January plus 15 days as a grace period. But if you make a transaction on 1st December, you get the shortest grace period of 15 days. While making any transaction you need to keep the billing date in your mind and make transaction accordingly.
In the case, if you crossed the grace period till pending on your bill payment, the bank starts earning interest on it on a daily basis.
Convert annual rate to daily rate
In order to get a clear idea about how your interest is calculated you need to convert your APR to a daily percentage rate.
For this divide your APR by 365 – some banks may use 360. For instance, A credit card issuer offers you AN APR of 15% then divide it with 365, It is 0.041% per day. It looks tiny but it adds up.
Your Daily percentage rate looks smaller but when it adds up it becomes huge. Because your credit card balance can fluctuate from month to month as you make different payments each time.
For example, you made a purchase at the beginning of the months say AED 1,000.after 20 days you purchased a phone of cost AED 2,000. That means at the end of billing cycle day you owe at least of AED 3,000 from the bank where we exclude the small transactions you made throughout the month.
Calculate your average daily balance
.Now you start with unpaid balance the amount carried over from the previous month. If you make apurchase your balance will increase on payment it will decrease. Now multiply each balance with a number of days, each month then at the end of the year you will be paying around AED 195.68 in interest.
Bottom line : To Avoid paying any interest on Credit Cards, Always Payoff your Credit Card Statement due in full every month