Nearly everyone has a credit card in the UAE, and according to a report by yallacompare.com there was a 65% increase in the number of UAE residents applying for credit cards in the first quarter of 2017.
Credit cards offer convenience that doesn’t come with cash. You can pay for something that is expensive without having the worry of putting down a large lump sum straight away. But have you ever looked at the charges on your credit card bill each month and wondered how the interest was calculated?
So, how does your bank calculate your interest rate, and how does that translate into how much you actually pay?
UAE banks provide customers with a wide selection of different cards that can offer all sorts of financial benefits, from the always popular air miles credit card to dining benefits. But when they promote their credit card services, often they mention annual percentage rate, APR for short. The lower the APR number, the better it is for you. You get to pay less for the privilege of buying things with a credit card. The number will vary not only from card to card but also from person to person – the APR can be determined on factors such as credit score.
But in order to make sense of your own APR then it may be easier to convert your annual rate to a daily percentage rate or periodic interest rate. To find out your daily rate, divide your APR by 365 – some banks may use 360. For example, if your credit card has an APR of 15%, divided by 365 it’s 0.041% per day – not much, but it adds up.
And here’s where things get trickier. Once you know what your APR and DPR is, then you need to figure out how much you owe using your average daily balance. This is because your credit card balance can fluctuate from month to month as you make different payments each time.
So, let’s say at the beginning of the month you still owe the bank AED 1,000 and let’s say 20 days into the month you decide to buy a new phone costing you AED 2,000. That means at the end of the billing period you owe the bank at least AED 3,000 – that’s excluding other small payments you may have made on your card throughout the month.
To then calculate your average daily balance, you take the AED 1,000 x 20 days = 20,000. You then take the cost of your purchase, AED 2,000 x 10 (the remaining days of the month) = 20,000, add those two figures together which equals 40,000. You then divide that number by the number of days in the month, (40,000 ÷ 30 = 1,333). So, your average daily balance will be AED 1,333.
Are you with us so far? Now it’s time to calculate the amount of interest you will owe for the month. So, you take your average daily balance x your daily percentage rate x your billing cycle (1,333 x 0.041% x 30) And finally your interest from the month will be AED 16.39. Again, that may not seem like a lot but if you spend roughly the same each month then at the end of the year you will be paying around AED 195.68 in interest.
Obviously, you don’t have to pay any extra interest on your credit card bill. You can easily avoid it if you pay your balance in full each month. If you pay off the full amount rather than paying the minimum amount you will most likely only be covering the interest accrued.
You can also avoid high interest rates if you chose a credit card with low APR. Credit cards that offer benefits usually carry a higher APR. There are different types of card you can use from standard, gold or platinum. If you have a standard credit card, you are likely paying less interest fees than the rates that come with a platinum credit card. But if you have good credit history then some banks in the UAE could offer you extended interest free periods.
Now that you know how your credit card interest is calculated each month, click here to compare credit cards that offer everything from golfing benefits, low APR to cashback!