As a credit card user, you know how crucial your CIBIL score is to determine the interest rate of your card account. The more robust your credit profile is, the lower your interest rate will be.

When it is about the interest, the Annual Percentage Rate (APR) holds the key. The APR decides the amount you need to pay as interest.

But, aren’t interest rate and APR the same?

They are, and yet they are not.

Interest Rate and APR

When you avail a loan, the interest rate refers to the nominal amount, minus other costs, you need to pay on the loan amount. In contrast, APR is the all-in-one or effective rate that factors in the associated charges while calculating your net payable amount. Hence, the APR is almost always higher than the interest rate.

In the case of a credit card, however, both interest rate and APR refers to the same thing. For example, the best HDFC credit card charges 3.4% interest per month, and the APR works out to 40.8%.

But do you always have to pay a high-interest rate when you use a credit card?

No. Card providers calculate APR or interest rate on the outstanding amount after the due date and not on the entire withdrawn amount.

Interest Rate Calculation

When you purchase something with your credit card, the card provider gives you around 20 to 50 days to settle off the bills.

The two terms that you should always remember are the statement date and the due date.

The statement date is the date when your bank compiles the statement containing your previous month’s expenses. The due date is the date within which you should ideally clear off your dues.

Let us understand this with an example.

You apply for a credit card on 1st March and start using it from 1st April. Between 1st April and 30th April, you make ten transactions using your card.

The lender generates the statement on 1st May and gives you time till 25th May. If you pay the entire withdrawn amount before the due date, the card provider will charge zero interest. If, however, you pay a fraction of the original amount and decide to pay the rest in the next billing cycle, the lender would charge interest on the remaining amount.

Hence, if you want your credit card to be interest-free, it is better to pay before the due date.

Alternatively, if you made a high-value purchase and are unable to clear if off instantly, you may apply for the SmartEMI scheme offered by lenders like HDFC. The SmartEMI scheme converts your outstanding dues into EMIs, so you can pay every month and clear off the amount.

But, what if your card provider does not offer you such a facility? You need to know the interest calculation process to know the best way to save money.

The Interest Rate Calculation Process

Interest rate calculation is a simple process, and knowing it can give you an edge in finding out ways to save. Make sure to keep a credit card statement handy.

Step 1 – Find Out the Daily Periodic Rate

The credit card statement mentions the APR or the annual rate; although you pay interest on a daily basis. To figure out how much you are paying daily, you need to know the daily periodic rate.

You may divide the APR by 360/365, and the resultant figure is the daily rate. Hence, if the APR is 40.8%, the daily periodic rate is 0.11%.

Step 2 – Calculate the Average Daily Balance

The Average Daily Balance is a dynamic figure. It goes up when you purchase something and goes down when you pay the card provider.

When you have an unpaid balance, the card issuer charges the interest on the Average Daily Balance. Finding the Average Daily Balance is easy.

Take a closer look at your daily balance during the billing period and note it down. Now add all daily balances and divide it by the total days.

Step 3 – Multiply

Now that you know what the Average Daily Balance and Daily Periodic Rate is, you should multiply both figures to get the daily payable amount.

To find out the monthly payment amount, you have to multiply the daily payable amount with the total days in the billing cycle. It is prudent to know that the card provider might charge compound interest on the daily payable amount, which may increase your actual payable amount a little.

Once you figure out the daily payable amount, try to find out ways to clear it as early as you can. You may pay as many times as you want. Ultimately, the target should be to reduce the average daily balance, which will bring down the interest.

Credit Cards

How does the Card Provider Determine the Interest Rate?

Most lenders charge the same APR for all cardholders. However, some lenders or cards have their own APR range, which typically hovers between 1.99% to 3.5% per month. The better your credit score, the more are the prospects of getting a lower interest rate.

The APR also depends on the Prime Rate or the rate in which financial institutions provide funds to big borrowers. The credit card APR rises with every increase in the Prime Rate.

Another factor that affects credit card interest rate is the card type. If you lay your hands upon the best credit card for online shopping, which gives you reward points, the interest rate might be marginally higher than other cards.

Do You Want a Lower Interest Rate on Your Card?

Getting a lower rate is a dream of all card users, but the reality for a few. However, getting lower rates is easier than you think.

The following things can help you get a lower interest rate on your credit card:

  • Aim to increase your credit score.
  • Do not carry forward the unpaid balance to the next billing cycle.
  • Pay as much as you can afford if you are unable to clear off the entire debt.
  • Try to reduce your Average Daily Balance by paying as many times as you can in a month.


Credit card interest rates are flexible. With a reward app like CRED, you can get additional rewards on your card purchases. If somehow, none of the options brings down your interest bills, you may opt for the balance transfer facility with a different lender. You can learn more about balance transfers if you decide to go with this option.