One of my friends was in for a shocker when she received her credit card bill sometime back. Going through the card she realised that she had paid an interest of Rs 1,849.23 on dues of Rs 67,009 at the rate of 2.95 per cent per month.

Her initial reaction was that the bank had made some mistake, as her calculations showed that she was not supposed to pay an interest that particular month.

During the billing month she had spent Rs 37,000 buying some white goods. The bank ideally should not have charged an interest for the outstanding amount, as

• Interest on purchases through a credit card is charged only after the amount is not repaid until the due date;
• She had just received the bill, the due date was quite sometime away; and 
• She had repaid the Rs 30,008 that was due on her last bill.

Before calling the bank she decided to carefully scan through her last month's statement. On careful reading she realised that she was paying an interest of Rs 1,849.23 because while paying her entire outstanding of last month's bill she had paid a rupee less!

• Every credit card has a billing date on which the bill having a list of purchases in the last billing cycle is generated;
• The bill has a certain due date by which the outstanding amount has to be repaid;
• If the amount outstanding is repaid by the due date, no interest is charged; and
• The individual thus ends up getting free credit during that period.

Where did my friend go wrong?

The bill date for my friend's credit card was the first of the month and the due date by which the money had to repaid was twenty-third of the month. Last time when she had received the bill:

• She had made a payment of Rs 30,008 to repay what she thought was the total outstanding due;
• After carefully reading the bill she realised that the total amount due was Rs 30,009 and not Rs 30,008;
• When the entire amount is not repaid, there is no free credit period available;
• Interest is charged from the very day, when the money is spent.

Other than this, interest also needs to be paid on the entire amount that was due in the last billing statement. Banks do not take into account the money that has already been repaid while calculating interest. Hence, my friend had to pay an interest of 2.95 per cent per month, on the entire amount of Rs 30,009 in spite of repaying Rs 30,008.

Besides she had spent Rs 37,000 on June 2, a day after the last bill was generated. As explained above, there was no free credit period available on this purchase as well. Hence an interest of 2.95 per cent per month had to be paid on a total amount of Rs 67,009, for a period of 29 days, till the current bill was generated. This amounted to Rs 1,849.23.