Interest on credit card

Credit cards issued to the card holder have an interest charged on them. This interest is levied by the bank .The credit card issuer decides the rate of interest that’s dependent on various factors and is source of revenue for the bank ,on the credit card issued to the card holder.
The user is given a credit limit upto which he can spend, when card holder makes a purchase, it kind of loan he has borrowed from the bank for a stipulated period and needs to pay the amount full or in parts before the due date. The issuer suffers loss if this amount is not paid on time. Failing to pay this amount would result in interest to be incurred; this can be based on algorithms, compounded on daily or monthly basis. This amount generates money for the bank. The method of calculation can be based on –
• Average daily balance
• Adjusted balance
• Previous balance
To make things simpler, let me explain you with a simple example-
When the card holder does not pay the full amount spent by the due date, interest is calculated on daily outstanding balance, and the total amount is sent in the monthly/annual statement. Let’s say, below is the transaction of Mr. Xyz,
Here the formula used: principal amount*rate of interest*number of days
Rate of interest-2.95%
Statement Date 2-Aug Details Amt 2-Sep Detail Amt
Transaction Date 16-Jul BATA 600 4-Aug LEE 500
31-Jul Cafe Day 100
Payment Date 21-Aug Cash Paymt 600
2-Sep Interest Charge 40.52
MAD 100 MAD 100
MAD –Minimum amount due, TAD – Total amount Due
Interest calculated would be 40.52, let’s see how
 Mr.XYZ has paid Rs600 for the outstanding amount of Rs700, for the month of Aug
 From 16th July,Rs 600(transaction date) to 2nd-Aug (statement date)
 Total amount due ,Rs700 from statement date of 2nd-Aug to part payment date 21st Aug
 On balance Rs100=Rs700 –Rs600 , from 21st –Aug, payment date to 2nd-Sept next statement date
 And on next purchase from 4th-Aug to 2nd-Sept
Calculation as below
600 x 2.95% x 18/30 days = Rs.10.62
700 x 2.95% x 20/30 days = Rs.13.77
100 x 2.95% x 11/30 days =Rs.1.08
500 x 2.95% x 28/30 days = Rs.14.75
Total = (10.62+0.30+13.77+1.08+14.75) = Rs.40.52

The concept of credit card for the bank is based on the risk involved while providing the credit to the card holder and in turn is based on various factors like credit history of the customer, revenue generated based on that, probability of earning/losing the amount lent. Card holders can however make use of the credit card judiciously and defer the possibility of falling in the trap of interest.