Credit cards make your life easier. Whether it’s shopping, travel, or dining, it is a safe and easy alternative to making payments in cash. Once you get your credit card bill, all you need to do is pay it off before the due date, and you’re fine.
Sounds simple, right? But at times, you might miss the date either because you haven’t keep a tab on your dues or due to an emergency, and you could not make the payment in time. There are some apps like CRED that send reminders to you on time so that you make your credit card bill payments timely.
Let’s find out what happens when you pay your credit card debt on time and when you don’t. You can understand how your debt keeps growing and how to prevent it.
How Are Credit Card Outstanding Dues Calculated
The most important thing you should keep in mind regarding credit cards is the credit-free period. It is calculated as 20 days from the day the bill or statement is issued by the concerned bank. If you don’t want to pay any interest, then you should settle your dues within those 20 days.
However, due to some financial problems, if you are unable to pay the entire amount, then you need to pay the minimum monthly amount due that is around 5%. Paying the minimum amount due and settling the remaining amount in deferred instalments is known as a revolving credit facility.
When you use this facility, your total outstanding goes up due to the interest levied. The rate of interest is high, being 3 to 4% per month, and your monthly financial liabilities go up by that amount.
Though there are online debt repayment calculators, you should know how your debt is calculated. Let us consider an example to make things easier for you. We will analyse different situations for greater clarity.
Payment Within the Due Date
We assume that you have made a payment of Rs. 10000 with your credit card. The transaction date is July 1, 2020, and the statement date is July 6, 2020. Your credit-free period ends on July 26 2020, the due date.
Other assumptions include a monthly interest rate of 3.5%, and the minimum amount due is 5% of the transaction amount is Rs. 500 if you decide to opt for the revolving credit facility.
Since you have made the payment within the due date, there is no interest charged, and you pay Rs. 10000.
Part-Payment Before the Due Date
In the second case, you make a payment of Rs. 5000/- on July 21 that is before the due date, July 26. Your statement date is August 6, and there are no transactions between July 6 and August 6.
You pay interest on Rs. 10000 between the 1st and the 21st of July amounting to Rs. 241.56. From July 22 to August 6, you pay interest on Rs. 5000 totalling Rs. 86.4. Your total liability is Rs. 328, the sum of the two, till your next statement is generated.
Part-Payment After the Due Date
In the third situation, you make a payment of Rs. 5000 on July 28, or after the due date. Interest will be levied on Rs. 10000 for the period 1st to July 28, the amount being Rs. 322.22. From July 29 to August 6, you will pay an interest of Rs. 51.8 on Rs. 5000/-.
The total amount due would be Rs. 374.
Part-Payment and New Transaction
In the last situation, part payment of Rs. 5000 is made after the due date on July 28, and you make a fresh purchase of Rs. 1000 using your credit card on July 15.
You pay interest on Rs. 10000 till July 15 of Rs. 172.6 and interest on Rs. 11000 from July 16 to July 28 of Rs. 164.5. You pay an interest of Rs. 62.13 for the period July 28 to August 6 on Rs. 6000/-.
How Do You Use a Debt Repayment Calculator
Now that you know how your debts accumulate let’s find out how long you need to pay off your credit card debt. The online debt payment calculator helps you calculate the debt repayment period.
You need to enter the outstanding loan amount, the amount that you can pay every month, and the rate of interest charged by the bank monthly.
If you have an outstanding of Rs. 50000 and decided to pay Rs. 5000 every month, then it would take you 13 months to repay the total dues including interest. The amount outstanding would be Rs. 62, 632.65 with a monthly interest of 3.5%.
As a rule of thumb, avoid using the revolving credit facility. If that is not possible, try avoiding any fresh transactions until you have paid off your initial liability. New card transactions will attract more interest, and your debt goes up.
Understanding how your interest on your credit card dues is calculated is important for you. There are some banks that charge interest from the date of purchase and not the statement date. Be sure to talk to the bank and get your queries clarified before you start using your credit card.
The total interest payable by you is subject to GST at 18%. If we take the above example, then your monthly outstanding would be much higher than Rs. 62,000/-. It would take you longer to repay the debt.
Use Your Credit Card Wisely
The debt repayment calculator shows how your financial liabilities can go up and create problems for you. It can delay your financial goals, and you may have to also look for ways to earn income.
Credit card spending should be planned. Use them for making your regular payments and don’t fall into a debt trap by trying to maintain a lifestyle you can’t afford. When you have a budget and use credit cards, it’s a rewarding experience.
Suppose you do have credit card debt, whatever extra income you have should be used to pay off the debt. You should rank your debts in order of the highest interest rate and start paying them off first. You can also create a repayment schedule and stick to it.
Pay off your credit card debt and live debt-free.
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