Engineer's Finance

All of us have Credit Cards (generally more than 2), it is a must to have Credit Card these days (fashion statement).

These days when I go for shopping the first thing I get to hear at the billing counter is “How is the payment made? Through cash or credit card”. Most of the guys don’t understand how the credit card works. All that they do is just use the card for just shopping and don’t plan up things. Shopping is done at random, no plan is ever done and mostly we buy things we don’t really require. It might not be a necessity at all still we fancy buying them. (Anyways it is not my cup of tea 🙂 ).

What I want to convey is Using credit card is always a good option until unless you screw up your finances. This is how I use my credit card for my benefit. Whenever I want to buy something that costs more than 10k then I plan to buy it just immediately after my billing cycle ends. In this way I will have at least 2 months salary to pay back the amount without paying any interest. Confused???

Think that My billing cycle is from 20th of previous month to 19th of present month. Any purchase made on 20 or after that will be charged to me in the next billing cycle. Once the bill is generated the bill has to be paid with in a minimum of ten days to fifteen days. In my case I get a grace period of 52 days i.e. I can use the amount without any interest for 52 days.

(Does that make any sense to you??) So most of the time when I make a big purchase which costs more than 10k I make sure I do it with in 20 to 30 of the month on the card, so that I can have two months salary to repay back and I make sure that I do that. This is one of the most easiest way to tame your card.

Credit card’s Minimum Balance

Ever wondered how the Minimum Balance is calculated??

This is how it is done.

Interest = APR/100 x ADB/365 x number of days revolved
Total Amount = Outstanding balance + Interest
Minimum Payment Due = 5% of Total Amount

where APR stands for Annual percentage rate and ADB stands for Average Daily Balance.

For e.g.
I make a purchase of Rs. 1000 on 3rd of May and My bill is generated on 20th of May and my due date is 12th June. If I make a payment of Rs. 1000 on or before 12th June then no interest will be levied upon me for the transaction. Even if I make a payment of Rs. 999 it is considered to be a partial payment and interest will be calculated. Assume that my APR is 2.

My Minimum Payment due is 5% of the purchases that is made for the current month that amounts to 5/100 * 1000 = Rs. 50. Now I have an option to pay either Rs. 50 or Rs.1000 if I make any payment between this range is not worth for me since I need to pay the interest for the purchases.

Assuming I make a payment of Rs. 500 on 12th June. My balance is Rs.500 but the interest is calculated for Rs. 1000 and not for Rs. 500.

Average Daily balance is calculated in two ways :
1. Including new purchases.
2. Excluding new purchases.

Consider for Scenario Including new purchases :

I make a new purchase of Rs. 1000 again on 30th May.

Now my bill looks like this:

1. Purchase on 3rd of May = Rs. 1000
2. Paid on 12th of June = Rs. 500
3. New Purchase on 30th of May = Rs. 1000

When my bill will be generated on 20th of June:
Interest calculation :
Initial purchase * APR/100 * No. of days
1. 1000 * 2 /100 * (20th June – 3rd May) = 20 * 47 days = ADB
2. 500 * 2 /100 * (20th June – 12th June) = 10* 8 days = ADB
3. 1000 * 2 /100 * (20th June – 30th May) = 20 * 20 days = ADB

Average ADB = (20*47) + (10 * 8) + (20 * 20) / 30 = 47.33

So my total amount payable is : 1000 + 500 + 47.33 = Rs. 1547.33
Minimum Payment due is 5% of Rs. 1547.33 is Rs. 77.37

Consider for Scenario Excluding new purchases :

Calculations remain the same for this except we don’t include the new latest purchase we made and hence ADB = (20 * 47) + (10 *8) /30 = 34

So my total amount payable is : 1000 + 500 + 34 =Rs. 1534
Minimum Payment due is 5% of Rs. 1534 is Rs. 76.70

Conclusion:
We are ignorant about the calculations involved in the credit card’s interest calculation. Most of the financial institution include the new purchases as well and then calculate the interest. If you skip once paying the entire amount you will be charged interest. There are various methods of calculation that the financial institution use of derive money out of their customers. Better be careful. Whatever I have provided is just one of general methods. Please read your credit card documents carefully and analyze your position and try to pay back the balance in your credit card as soon as possible.

In Citibank silver credit card (the one that I have) for the amount Rs. 5000 if I pay only the minimum balance every month then I need to pay for 6 years to become debt free.

I am sure none of you bothered about these calculations.. Neither did I for sometime.. Once I did and it made a difference in my life.. Please be aware of this..

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