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The credit card is one of the greatest modern-day marvels that has surpassed all barriers and made its way into every pocket across the world. According to statistics, there have been a substantial rise in the number of credit card users and applicants within the past few years.
This tiny piece of plastic offers convenience and ease that is usually not attainable with cash. To keep it simple you can use your credit card in UAE to make purchases initially and then pay for them later. However, this easy to obtainable form of credit comes with a cost i.e. interest rate.
Every month when your credit card bill is generated there is an amount added over the spent value as the rate of interest. Have you ever wondered how is this rate of interest calculated? How do credit card providers determine the percentage of interest rates that would apply to a particular type of credit card in UAE?
Before we go ahead and understand how the interest is calculated on credit cards in UAE, it is vital that we a quick look at the billing cycles of credit cards.
When you receive a credit card there is a billing date that is to be chosen by the cardholder based on the convenience and payment schedule. Once you choose a date, one the same date every month your bill is generated by the credit card agency. From the cardholder’s point of view, the best thing to do is to choose the first date of the month as your billing date and by this, you get an additional 25 days to pay your bill by its due date.
The interest is not applicable to your credit card payments right after you make the purchases, instead, banks and credit card providers offer a grace period of 45 days to 55 days during which the interest is not charged. Optimizing your billing cycle in the right way you can maximize the grace period of paying the credit card bill.
To understand the scenario let us consider an exemplary scenario-
You choose the billing date as 1st of every month and on this date, you have zero outstanding amount to be paid. In order to get the longest grace period on your credit card in UAE, all you need to do is to make your payments on the second of every month. By doing this you will have 30 days before the new billing cycle begins along with 15 days as the grace period which totals up to 45 days.
To avoid getting stuck in debt traps that are hard to escape credit cardholders should be paying their bill to time. Making timely repayments not only helps you to be safer side financially but also keeps your credit score on the right track.
When it comes to assessing the credit card interest rate, we typically lay emphasis on the rate of interest. The key in real-time to understanding how the interest rate is applied on your credit card in UAE is to first understand how it is calculated.
Most of us think that the percentage of interest that is applicable to the credit card is calculated based on the total expenditure. For example, if the rate of interest applicable to the credit card in UAE is 5% and you spend AED 1000 using your card, then the final amount will be equal to AED 1050.
But this is not how credit card interest rate is determined in real-time.
You might have spent a total of AED 1000 via your credit card in UAE but it is not spent completely on a single day, instead, it is spread into different bits and pieces of small and large payments throughout the month. Since the card is used is at different instances to make variable payments the net balance of the credit card in UAE, fluctuates proportionally with expenditure.
In order to make it a bit easier for the credit card providers and banks to focus on how long the credit card balance is carried forward by the cardholder. Based on this the total amount owed by the cardholder is spread throughout the entire month to evaluate the ‘average daily balance’ (ADB).
The Average daily balance (ADB) can be represented mathematically by the following formula,
ADB= Given balance x total number of days balance will be carried forward/ total number of days in the given month
With every transaction, your average daily balance (ADB) is changed and finally, at the end of the month, all the daily balances are added up, and then the rate of interest is applied on the credit card in UAE.
In a Nutshell
Credit cards are one of the most popular financial tools that allow access to credit with just a swipe. However, in order to understand how much interest, you are being charged on your credit card in UAE it is vital to analyze the billing cycle.
Analyzing the billing cycle and getting familiar with terms like average daily balance will allow you to use your credit card in UAE more efficiently. Cardholders should always remember that just the way other tools work credit cards work in the same way, it depends on the skillset and knowledge of the user.